INTERNATIONAL AIRLINES GROUP

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Strategic Report Corporate Governance Financial Statements Additional Information

Links within this document Page links Reference to other pages within the report Web links Reference to further reading or viewing online

Annual report and accounts 2018 L A N O I T A ES N I L ERN R T ROUP N I AI G

Creating

Transforming Strengthening Annual report and accounts 2018 Advancing

Achieving Delivering

2018 Annual report and accounts CONTENTS

Strategic Report Financial Statements Management Report 2 Our highlights 116 Consolidated income statement IAG is required to prepare a Management Report in accordance 3 Chairman’s letter 117 Consolidated statement with Article 262 of the Spanish of other comprehensive income 4 Our network Companies Act and Article 49 of the 118 Consolidated balance sheet Spanish Commercial Code. Pursuant to 6 Chief Executive Officer’s review this legislation, this management report 119 Consolidated cash flow statement 11 Question and answers must contain a fair review of the with the Chief Executive Officer 120 Consolidated statement of changes progress of the business and the in equity performance of the company, together 12 Business model and strategy with a description of the principal risks 122 Notes to the consolidated 14 Our strategic priorities and key and uncertainties that it faces. In the financial statements performance indicators preparation of this report, IAG has 172 Group investments taken into consideration the guide 18 British Airways published in 2013 by the Spanish 20 Iberia National Securities Market Commission Statement of Directors’ Responsibilities 22 Vueling (CNMV) which establishes a number Independent Auditors’ Report of recommendations for the 23 Aer Lingus preparation of management reports 24 LEVEL of listed companies. Additional Information The Management Report is composed 25 IAG Platform by the following sections: 183 Alternative performance measures 27 Avios 12 Business model and strategy 186 28 Glossary IAG Cargo 14 Our strategic priorities and key 188 Operating and financial statistics 29 Digital performance indicators IBC Shareholder information 30 Risk management and principal 25 IAG Platform risk factors 30 Risk management and principal 37 Financial overview risk factors 38 Financial review 37 Financial overview 49 Regulatory environment 38 Financial review 51 Sustainability 49 Regulatory environment 51 Sustainability The Annual Corporate Governance Corporate Governance Report is part of this Management 72 Chairman’s introduction to corporate Report but has been prepared governance separately. 74 Board of Directors This report has been file with the CNMV, together with the required 76 Corporate governance statistical annex, in accordance with the 88 Report of the Audit and CNMV Circular 2/2018, dated June 12. Compliance Committee The Annual Corporate Governance Report and the statistical annex are 91 Report of the Nominations also available on the company’s Committee website (www.iairgroup.com). 94 Report of the Safety Committee The Non-Financial Information 95 Report of the Remuneration Statement in response to the Committee requirements of Law 11/2018, of December 28, (amending the Commercial Code, the revised Capital Companies Law approved by Legislative Royal Decree 1/2010, of July 2, 2010 and Audit Law 22/2015, of July 20, 2015), is part of this Management Report and is available on the Company’s website (www.iairgroup.com). Strategic Report

“IAG continues to deliver in a changing industry. We are responding to consumer needs, deliver on our

financial targets, operate with sustainability at our Corporate Governance heart and leverage technology to support our vision. We’re confident that we will continue to deliver for our customers and shareholders while investing in the future of our people and airlines. IAG is built to succeed and we hope you’ll join us on our journey as

we move towards greater achievements together.” Financial Statements

Willie Walsh Chief Executive Officer Additional Information

www.iairgroup.com 1 Our highlights

Operating profit before exceptional items (€m)1 Value returned to shareholders3 +€280 million vly +25% vly 2018 2018 3,230 615 c. 700 €1,315m 2017 2017 2,950 550 500 €1,050m 2016 2016 2,535 495 500 €995m

Dividends Share buyback Special dividend

Return on Invested Capital1

17.3% 13.2%4 13.3% 26.8% +1.4pts +1.0pts -0.1pts +3.8pts ASK: 2.5% ASK: 7.1% ASK: 8.9% ASK: 10.0%

IAG Platform

INTERNATIONAL AIRLINES GROUP

16.6% +0.9pts Our financial performance

Statutory results 2018 20171 Versus last year Total revenue € 24,406m € 22,880m 6.7% Operating profit after exceptional items € 3,678m € 2,662m 38.2% Profit after tax and exceptional items € 2,897m € 2,009m 44.2% Basic earnings per share 142.7€c 95.2 €c 49.9% Cash and interest-bearing deposits € 6,274m € 6,676m (6.0%) Interest-bearing long-term borrowings € 7,509m € 7,331m 2.4%

Alternative performance measures2 2018 20171 Versus last year Profit after tax before exceptional items € 2,481m € 2,231m 11.2% Adjusted earnings per share 117.7€c 102.2 €c 15.1% Adjusted net debt € 8,355m € 7,759m 7.7% Adjusted net debt to EBITDAR 1.6 1.5 0.1 pts

1 2017 figures restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. 2 Alternative performance measure calculations page 183. 3 Presented in the year they were proposed 4 Excluding LEVEL For definitions see Glossary page 186.

2 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 CHAIRMAN’S LETTER

A business model built for Strategic Report sustainable growth Corporate Governance

“I’m delighted to welcome you to our latest Annual Report which charts another year of high

achievement for all Financial Statements our operating airlines in an increasingly testing economic environment.” Antonio Vázquez Chairman Additional Information

2018 was another year of strong growth agreement between the UK and EU will highest standards of governance and the for our business, despite significant be reached which allows flights to new UK Corporate Governance Code’s economic and political challenges. continue as normal. determined aspirations are and will be a big focus for the Board. We’re thinking To report operating profits of €3,230 Liberalisation in Europe has delivered deeply about how IAG - a parent million before exceptional items (up by so much, benefitting around 1 billion company, overseeing a diversity of brands 9.5%) on revenues of €24.4 billion is a consumers and sustaining thousands and cultures – can make a meaningful significant achievement at a time when oil of jobs each year. And IAG remains reality of the Code’s demands, not least prices were volatile and the geo-political confident that its operating companies on stakeholder engagement. environment uncertain. will comply with relevant ownership and control rules post Brexit. We also remain firmly fixed on growing Difficulties lie ahead on both these fronts, sustainably. We are on track to meet but we remain confident we have the Consolidation remains a prime motivation our 10 per cent carbon efficiency right strategy, supported by a unique for IAG. It takes two different forms – full- improvement target of 87.3gCO /pkm business model and a robust governance blown M&A activity and, more frequently 2 by 2020 and are making big progress structure, to continue pursuing in recent times, acquiring distressed on reducing onboard waste. long-term growth. assets from airlines that fail. We have a business model ideally suited to pursuing More widely we are proud of the lead role Forecasts from the International Air both paths. we are playing in industry-wide action on Transport Association make good carbon. Our sector is the first to agree a reading. They predict our industry’s net Joint business agreements are also worldwide mechanism to reduce profits will increase to $35.5 billion this crucial. We’re very pleased that the emissions and the global CORSIA offset year - the tenth consecutive year of profit agreement between British Airways, Iberia and reduction programme, which we for the industry, and, more importantly, and LATAM received approval in Brazil, advocated for strongly, is an initiative the fifth in a row where returns will Uruguay and Colombia, promising real few industries can match. exceed the cost of capital, creating benefits for travellers between Europe value for investors. and South America. Approval from the I hope in the following pages you can Chilean Free Competition Defence Court clearly see that IAG continues to grow In some sectors, that wouldn’t make a was also received in 2018, though this and prosper, much of which is down to headline. In the airline industry, given its remains subject to final ruling by the the terrific work done by people across history, it is big news. Chilean Supreme Court following an the Group. It matches our own vocation to deliver appeal. These relationships have We are all conscious of the challenges consistent returns to shareholders. We longevity. In February 2019 we celebrated we face, but very excited about the were delighted to return some €1 billion in the 20th anniversary of the oneworld opportunities that lie ahead. dividends and share buy backs in 2018, for alliance that includes both British Airways the second year running. and Iberia. Antonio Vázquez Chairman Brexit is certainly one of the biggest This is IAG’s eighth year. We remain a challenges we face. However, we remain young company with a unique structure. confident a comprehensive air transport To sustain our success we must apply the

www.iairgroup.com 3 OUR NETWORK Our business around the world

IAG combines leading airlines in the UK, Spain and Ireland, enabling them to enhance their presence in the aviation market while retaining their individual brands and current operations. The airlines’ customers benefit from a larger combined network for both passengers and cargo, and a greater ability to invest in new products and services through improved financial robustness.

See pages 14 – 17 for more about our strategic priorities.

British Airways Iberia Aer Lingus LEVEL

4 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report

Passengers Available seat kilometres

113million 324,808 million Corporate Governance +7.7% vly +6.1% vly

Destinations Aircraft Cargo tonnes kilometres 268 573 5,713 million +27 aircraft vly -0.9% vly Financial Statements Additional Information

British Airways Iberia Vueling Aer Lingus LEVEL

www.iairgroup.com 5 CHIEF EXECUTIVE OFFICER’S REVIEW Delivering continued growth across our brands

“IAG’s unique business model has once again proved flexible and resilient, even in an increasingly turbulent environment, and all our airlines performed well in 2018. We go into 2019 committed to achieving continued growth.” Willie Walsh Chief Executive Officer

2018 was a good year for IAG and all vital to our business, where fuel Consolidation of its airlines, once more underlining the accounts for some 25 per cent of our We continue to explore opportunities unique strength and flexibility of our cost base. to bring new airline brands into IAG and business model. To offset the headwind of higher during the year we held discussions We started the year expecting to prices and increase operating profit with Norwegian. see some softening in our markets before exceptional items from €2,950 We’ve watched the airline closely over compared with 2017, but we were well million in 2017 to €3,230 million, while recent times, initially curious to see if positioned to take advantage of increasing investment in our customers they could make the low-cost, longhaul opportunities as they arose. right across our airlines, was a very proposition work from the consumer’s good achievement. The macro-economic environment was point of view. Most in the industry relatively good, especially at the start of We’ve been saying for some time that doubted they could make a reality of the year. As the year progressed, things there is still a lot more we can do. Of a fully unbundled longhaul fare, where became a little more turbulent with course, it gets more difficult as time the price of the ticket gets you on the increasing noise around Brexit and goes on. The more we achieve, the aircraft and everything else, from growing worries about the impact harder it is to keep improving. bags to food, drink and pillows, of the China/US trade war. is an extra charge. But when I stand back and look across These issues have an effect on market IAG, balancing the positives and the We were pleasantly surprised with their sentiment, but we didn’t see much negatives, I can’t help but feel a sense success and it gave us confidence to direct impact on our business. Where of continued confidence in the future. believe there was a new segment of the we encountered problems, it was down market to be served, largely focused on I think it is inevitable that Brexit will have to local economic issues, in markets the very price-conscious, leisure- a greater impact in the months ahead. It such as Argentina. Both premium and orientated consumer. The challenge has been quite shocking to get so far in non-premium revenues held up strongly though is to have a genuinely low-cost the political process without having any on services to North America and base throughout the operation – real clarity about the future. That can't remained strong in Europe and on our including aircraft, crewing, product be positive for the economy. Asian network. and airports – so that you can Whether you are for or against the UK operate profitably. So far, Norwegian The sharp rise in fuel prices was a leaving the EU, all the credible forecasts has not been able to prove that. surprise, however, and it certainly I’ve seen predict that Brexit will have a created problems for some of our Nevertheless, having seen real potential negative economic impact in the short competitors. We took a view at the end in the model we looked to use it to medium term that is likely to damage of 2017 that it was probably going to ourselves with the launch in 2017 of consumer confidence and act as a rise faster than generally expected and LEVEL, our own low-cost longhaul further drag on business investment. took some important pricing action brand. But we also contacted We need to remain very agile in the through our hedging programme – so Norwegian to see if they had an interest months ahead. in becoming part of IAG,

6 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 opportunistically acquiring a small stake. Transport and Travel, flew its first within IAG. People talk of seamless Strategic Report Although we made some progress in scheduled service from Hounslow transition. Well, this was a very good talks, ultimately, we concluded we Heath, near Heathrow, to Paris. The example of that, although inevitably would not make an offer. And, as I’d centenary provides British Airways with Sean will bring a different style of been clear that we would only hold an a platform to focus on its brand with leadership to the role as he picks investment if it was a bridge to full new advertising, new business class up where Stephen left off. acquisition, we announced our intention products and the arrival of the Airbus Vueling got hit very hard by last to sell our stake. A350-1000 in its fleet – all clear summer’s air traffic control crisis within evidence of the increasing investment We wish Norwegian well. They’ve clearly Europe, not least as a disproportionate we are making in our customers. got a challenge in trying to strengthen number of flights from its Barcelona Corporate Governance the balance sheet and generate British Airways also has the security of base pass through airspace controlled additional cash. But we still believe there knowing the UK and US have agreed a from the ATC centre in Marseille, a is a clear low-cost longhaul market to be new agreement that will take effect particular bottleneck. addressed and we will do that after Brexit, underpinning the airline’s The problems were severe. For the first organically through LEVEL. powerful transatlantic business. There eight months of the year there was a had been a lot of scaremongering Measuring customer satisfaction 3.5 per cent increase in all airlines’ flights about this issue, but I was always through European airspace. In the three We are now using the Net Promoter confident the alignment of interests Score (NPS) in a consistent way across peak months of June, July and August between the UK and US would result delays increased by 115 per cent with all our airlines, as a sensitive non- in a new deal, as it has. financial metric to gauge how customers the average length of disruption Historically, airlines have often made the increasing by 190 per cent. Some 61 per respond to our services. Financial Statements mistake of undergoing restructuring and cent of delays were caused by NPS is not about measuring our airlines then assuming the job is done. That is ATC staffing issues, 30 per cent by against each other. More it is about not what we’ve seen at Iberia, where the weather and 9 per cent the result of tracking investment within the individual extraordinary transformation achieved strikes by controllers. airlines to see how they are meeting in recent years is continuing to evolve in customer expectations. Clearly, many of these problems were the second phase of its Plan de Futuro. outside Vueling’s control yet affected its It gives us a huge amount of granular It’s a very structured approach to NPS metrics, although they have data, which we analyse in great transformation and it is showing recovered strongly since and the airline detail, and lets us see the cause and through in continued strong continues to make great progress in effect of our investment decisions. performance, an improving NPS, the other respects. The focus in the year arrival of new aircraft with the delivery If the customer response is not what ahead will be on increasing operational Additional Information we expected, we can dig into the data, of the Airbus A350-900, and with its resilience as Vueling prepares for further see why and adjust. It is proving a brand well positioned in key markets. air traffic problems this summer. Helped very useful tool for the Management The team at Iberia deserve great credit by analysis of the NPS data, the team is Committee as we plan for all they’ve achieved but also for working hard to ensure we make the future investment. recognising that there is always more to right scheduling decisions and have the Operational highlights do. They refuse to be complacent and right recovery plans in place to help know that further change will secure customers through any disruption. We saw a strong performance right Iberia’s position in its main markets, will across our brands in 2018, even though The ATC situation needs to change, give us continued confidence to invest each of our airlines experienced and we have been campaigning with and will offer its people a secure future. operating challenges. our competitors through the trade They’ve done a great job. association, Airlines for Europe, British Airways had a very stong year, Aer Lingus continues to justify the to ensure this issue gets properly exceeding many of its targets. The investment we made in it. It has been addressed by ATC operators. We increased investment in the customer a great acquisition for IAG and I’m are also pleased the European that we spoke about last year is now convinced the team there has been able Commission has responded positively showing real benefits, reflected in a to achieve so much more than they to our calls for action. fantastic, 10 percentage point uplift in could have done as a stand-alone airline. the airline’s NPS. LEVEL has made good progress since We’ve seen significantly more expansion its launch two years ago. It continues to But there were difficulties too. In late on North Atlantic routes than initially build a strong market in Barcelona, summer British Airways faced a criminal planned and this will continue in 2019 without cannibalising Iberia services to data attack that caused huge concern with the arrival of long-range Airbus Latin America from Madrid. Opening in to our customers and was a big A321s, allowing them to target new Paris has proved more challenging. We disappointment to us. In my view the destinations, including Minneapolis/St are addressing operational issues at the team handled the situation openly and Paul and Montreal. Thanks to our new base, but are confident the brand with great skill, contacting affected investment, Dublin is becoming a major has got real resonance there. customers quickly. The cyber security transatlantic hub, bringing profitable threat is a nasty reality for all businesses This year LEVEL has also started a growth to Aer Lingus and significant today and it is growing exponentially. It shorthaul operation with the launch of economic benefits to Ireland. requires constant vigilance and we work a base in Vienna. closely with the world’s leading experts We were sad Stephen Kavanagh IAG Cargo had one of its strongest to ensure our systems and processes decided to step down as CEO but years on record, as we continued to are robust. It’s a minute-by-minute delighted he has agreed to remain on offset the continuing imbalance in challenge that we take very seriously. the Aer Lingus Board. He deserves huge supply and demand by focusing on the congratulations for all he has achieved. British Airways has a lot to look forward premium end of the market. There will Sean Doyle has stepped in to replace to in 2019 as it celebrates its centenary. be challenges in the year ahead. Market him, moving across from British Airways, It’s great to be able to trace our roots statistics show there was a decline in and has hit the ground running. It's right back to August 25, 1919, when our traffic at the end of 2018 due to the US/ proof of the fantastic talent we have predecessor company, Aircraft China trade standoff. Fortunately, our

www.iairgroup.com 7 CHIEF EXECUTIVE OFFICER’S REVIEW CONTINUED

Our investment case Our unique structure drives growth and innovation to generate industry leading shareholder returns.

Unique approach • Disciplined capital allocation • Active portfolio management • Flexibility and rapid 61.1% INTERNATIONAL decision making AIRLINES GROUP • Platform with centralised capital functions to enable scale allocation and plug & play 18.7%

Portfolio of world- Brand contribution to growth class brands

• Portfolio caters to a British Airways Iberia Vueling Aer Lingus Level diversified customer base • Distinct brands with clear customer focus • Complementary networks +6.1 • Airlines focused on IAG total growth operational performance measured in ASKs

Innovation Cost efficiency • Dynamic and creative culture • Reduction in CASK ex-fuel at constant • Driving digital innovation in the currency since IAG’s formation in 2011 airline industry • Digital platform to grow revenues streams, enhance customer loyalty and drive cost efficiencies 400+applicants 11.1% c.5.0% to our latest and biggest cost reduction target reduction accelerator from 40 countries since 2011 by 2023

8 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report

“We need to remain

very agile in the Corporate Governance months ahead.” Our structure creates additional exposure in Asia is less pronounced than shareholder value over and above others. But, despite a more uncertain the individual values generated by market outlook, we are investing in our operating companies. We have technology and in new facilities at our a unique structure with a strong major hubs in a clear signal of our neutral parent company, unlike continued confidence. other European airline groups 10.7% Avios continues to grow and has which protect the interests of their enhanced the relationship with its main airline. IAG’s independence partners while simplifying the business. Financial Statements enables dispassionate, flexible and UK members of the Avios Reward rapid decision-making. We’re Scheme were moved into the British disciplined and allocate capital to Airways Executive Club which gave our operating companies based on 5.9% them more options to collect and spend strict return criteria in line with our the currency. And they can become Return on Invested Capital (RoIC) even more aware of Avios opportunities Other Group Companies target of 15 per cent, which is via a new rewards app. This is one of significantly more than our cost many digital initiatives that Avios has, of capital. And we manage a great and will continue to, embrace. Pay with 3.6% portfolio of profitable businesses, Avios, where customers can cut their

each with an attractive and distinct Additional Information airfare using the currency, has been a market positioning, which particular success and now accounts for diversifies our exposure to both 30 per cent of all redemptions. mature and fast-growing customer segments. Synergies as a result of Financial goals and outlook Global leadership the creation of IAG generated an At our Capital Markets Day in November positions additional annual €856 million of we updated the market on our five-year operating income by 2015, when financial goals. • Leading the consolidation we last reported group synergies, We’ve increased our forecast capital of the airline sector a figure that will have increased spending up to 2023 to reflect increased • Home markets: Barcelona, further with our growth in size and investment in aircraft, product and IT, Dublin, London, Madrid profitability since 2015. • Key routes: North and set higher targets for capacity and The result of our unique structure Atlantic, South Atlantic, EBITDAR. But our other goals remained is superior returns to shareholders, and intra-Europe unchanged, including our challenging with both EPS and dividend targets for an operating profit margin of • Joint businesses help grow growth, and further cash returns. 12 per cent to 15 per cent and return on our global reach Our RoIC has exceeded targets capital invested of 15 per cent. since 2015 and generated 16.6 per The message we wanted to convey to cent in 2018, significantly higher investors was clear – that even in a than most of our competitors. The higher fuel price environment we are operating margin of all our sticking to our goals. companies has improved since they joined IAG and we continue 2019 will bring new challenges, with to deliver the synergies of our Brexit the biggest unknown. But we combined airlines. refuse to be distracted by the uncertainty and are very focused on continuing IAG’s recent record of success.

#1 position in Barcelona London Madrid #2 in Dublin

www.iairgroup.com 9 CHIEF EXECUTIVE OFFICER’S REVIEW CONTINUED

Management team IAG Management Committee led by Willie Walsh is responsible for the overall direction and strategy of the Group, the delivery of synergies and co-ordination of central functions.

Robert Boyle Steve Gunning Julia Simpson Director of Strategy Director of Global Services Chief of Staff

Chris Haynes Alex Cruz Luis Gallego Martin General Counsel Chairman and Chief Executive Officer Chairman and Chief Executive Officer of British Airways of Iberia

Javier Sanchez Prieto Stephen Kavanagh Andrew Crawley Chief Executive Officer of Vueling Chief Executive Officer of Aer Lingus Chief Executive Officer of Avios

On January 1, 2019 Sean Doyle was appointed as Chief Executive Officer of Aer Lingus. Stephen Kavanagh will continue as non-executive director on the Board of Aer Lingus. Lynne Embleton Sean Doyle Chief Executive Officer of Chief Executive Officer of Aer Lingus IAG Cargo

Executive Directors not pictured: Willie Walsh, Chief Executive Officer; Enrique Dupuy de Lôme, Chief Financial Officer See pages 74-75 for our Board of Directors. For a full biography of each member please visit www.iairgroup.com.

10 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Q&A with Chief Strategic Report Executive Officer Willie Walsh Corporate Governance

“The message we wanted to convey to investors was clear – that even in a higher fuel price environment

we are sticking to Financial Statements our goals.”

Willie Walsh Chief Executive Officer Additional Information

Why has LEVEL launched disappointing. It’s not the sort of the UK. I’m delighted that other airlines shorthaul operations performance you expect from a and the Government agree with us that Qin Vienna? company like Rolls-Royce. We’re expansion must be done in a cost- It was an opportunistic move. We receiving compensation, but, to be efficient way that doesn’t result in acquired an Austrian Air Operator’s honest, I’d prefer to have the engines higher passenger charges. functioning properly. It’s fundamental to Certificate to take advantage of How have initiatives to our future relationship with Rolls-Royce additional slots in Vienna and use the innovate and invest in that they respond positively to this issue LEVEL brand to give it more exposure technology enabled you to in 2019, because the situation last year Q in Central Europe. We’re very pleased disrupt your business and change the was completely unacceptable. with the performance so far. This launch way you do things? re-enforces the strength of the IAG What are you doing Investing in technology is both exciting business model – a single economic to increase diversity and frightening. We’ve seen examples of entity, with multiple operating airlines, Qacross the Group? how technology can disrupt what we do using the right brands in the right IAG is a very diverse organisation, but and also opportunities to invest in it to markets to target the right customers. we have a challenge ensuring that benefit customers. A great example is How is IAG women can progress right to the top. the Mototok remotely controlled tug responding to cyber We’ve got so much great talent but if that allows us to be much more efficient Qsecurity threats? they can’t progress, then we are losing when aircraft push back from the stand. Every organisation, including IAG, is out. We’re looking at opportunities for Previously this led to delays but we now alive to these threats. They’re growing everyone across IAG but with particular have this fantastic bit of technology that exponentially and we have to respond focus on women in roles that have we can use at Heathrow. almost minute-by-minute, each day to traditionally been seen as male – ensure our systems and processes are engineering, pilots, senior management. robust enough to deal with them. To do I’m optimistic that, with the right actions so we work with world-class experts and buy-in from everyone, we’ll improve and, when required, can call on them for our performance. additional help. Following UK Parliamentary What is the impact of Rolls- approval for a third runway at Royce’s Trent 1000 engine QHeathrow last June, why has progress stalled since then? IAG (LSE) Qproblems? 599.00 We faced many problems with the Trent Heathrow continues to struggle to 1000 engine in 2018, which meant a justify the cost and, to date we’ve not number of our aircraft were unavailable seen a sufficiently robust plan to give us during the year. This was very confidence to support expansion. This is Watch the full interview on our website a critical issue – not just for us, but for www.iairgroup.com

www.iairgroup.com 11 BUSINESS MODEL Our business model is built to maximise choice and value creation

What we do IAG combines leading airlines in Ireland, the UK and Spain, enabling The airlines’ customers benefit from a larger combined them to enhance their presence in the aviation market while network for both passengers and cargo and greater ability to retaining their individual brand’s operations. invest in new products and services through improved financial robustness. The airlines each target different customer markets and geographies, providing choice across the full spectrum of customer needs and travel occasions.

Inputs and resources How we create value

A portfolio of world‑class Unrivalled customer propositions brands and operations • Ensure our operating companies collectively The Group portfolio consists deliver an unrivalled proposition able to fulfil of unique operating companies, customers’ needs across the full spectrum from full service longhaul to of travel occasions low-cost shorthaul carriers, • Use consolidation and develop organic options each targeting specific customer to differentiate the Group from its competitors needs and geographies. and ensure customer demands are met where they are currently underserved • Deepen customer centricity to win a disproportionate share in each customer segment

Global leadership positions Value accretive and sustainable growth 573 685 • Pursue value accretive organic and fleet routes inorganic growth options to reinforce existing or pursue new global leadership positions • Attract and develop the best people in the industry 268 3 • Set the industry standard for environmental destinations joint businesses stewardship, safety and security

A common integrated platform Efficiency and innovation IAG’s common integrated platform allows the • Reduce costs and improve efficiency by Group to exploit revenue and cost synergies that leveraging Group scale and synergy the operating companies could not achieve alone. opportunities • Engage in Group-wide innovation and digital mindset to enhance productivity and best serve our customers • Drive incremental value with external business- to-business services IAG Connect Digital MRO / Fleet

12 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

How we’re organised Our vision IAG is the parent company of the Group, exerting vertical and To be the world’s leading airline group, horizontal influence over its portfolio of companies. IAG is maximising sustainable value creation for our supported by its Management Committee which is made up shareholders and customers. of CEOs from across the operating companies and IAG senior management. The portfolio sits on a common integrated platform driving efficiency and simplicity while allowing each operating company to achieve its individual performance targets and maintain its unique identity. Financial Statements

The value we deliver

Shareholders 66 €cents Full year dividend 31 €cents and 14.8% increase year on year Additional Information Unrivalled Special dividend 35 €cents customer

propositions Customers 16.3 Net Promoter 1 Score Strengthening a portfolio -0.5pts vly of world-class brands and Employees operations 64,734 8.0% Manpower Workforce equivalent voluntary turnover 2 3 +2.1% vly 0% vly Growing global Enhancing leadership IAG’s common positions integrated platform 27% Value Eciency Female Senior executive accretive and +3pts vly and sustainable innovation growth Community and environment €343 million Income tax paid +44.7% vly 91.9g CO /pkm Carbon efficiency 2 -0.4% vly

www.iairgroup.com 13 Strategic priorities and key performance indicators

Strategic priority Strengthening a portfolio of world‑class brands and operations

How we Unrivalled customer proposition create value

Our activity in 2018 Despite Air Traffic Control (ATC) challenges, Vueling Our Following the detailed review of its customers’ has also continued to modernise and transform its performance emotional and functional needs in 2017, the Group operations and customer experience, increasing its committed to strengthening its customer focus market depth, creating new boarding groups to throughout 2018. Each of the airlines invested minimise queues, commencing a refresh of cabin significantly in improving their customer experience. interiors, with in-seat power and Wi-Fi, and delivering British Airways delivered catering improvements and an enhanced retail offering. opened new lounges, including a new First lounge at The LEVEL brand was selected as the brand to JFK. British Airways also continued its investment in launch IAG’s new shorthaul operations from Vienna, technology to solve customer pinch points and operating 14 shorthaul routes to a mix of European ensure speed and efficiency, trialling chatbots, destinations including London, Paris, Barcelona, Ibiza, automating certain processes in periods of Milan, Larnaca and Dubrovnik. Longhaul LEVEL disruption, extending the use of biometric boarding services also launched from Paris to the French gates in the US and rolling out a new homepage and Caribbean, Montreal and New York. selling flow. Iberia delivered an improved customer experience in its premium economy product, with Our priorities for 2019 more space, bigger in-flight entertainment and IAG remains focused on strengthening its customer better catering, and it also took delivery of its first centricity to ensure its operating companies continue Airbus A350, providing more new generation aircraft to adapt and focus their business models to reflect to its fleet. Aer Lingus continued to build its and meet changing customer expectations. 2019 will compelling competitive position, focusing on cost be a significant year for British Airways, in particular, reduction and growth to deliver price reductions to as it celebrates its centenary. its customers. Investment was targeted in areas that Customer product improvements will be ongoing would enhance its customer experience and keep with a renewed focus on the commercial systems Aer Lingus’ Net Promoter Score measure at its that underpin the customer journey and booking highest level, including baggage tracking and flow to ensure we can deliver greater personalised repatriation services, mobile web, improved longhaul service, customer choice and control. service and the full delivery of AerClub.

KPI or industry Net Promoter Score (NPS) Definition and purpose measure NPS is a non-financial metric which measures the customer’s sentiment and loyalty to a brand. At IAG a transactional NPS is measured: Customers respond 2018 about the likelihood to recommend an IAG operating 16.3 carrier no more than 7 days after taking a flight. vly -0.5pts Including NPS targets in the company bonus scheme has driven a stronger focus on improving the customer experience which together with customer advocacy drive competitive advantage leading to faster organic growth. 2023 target 32.0 R Performance IAG’s NPS in 2018 decreased 0.5pts versus last year's reported figure for the period April-December. Product upgrades and service enhancements rolled out across the airlines were well received by customers. However, this upside was offset by the challenging ATC environment in Europe and its impact on the operational performance of our operating carriers, in particular at Vueling.

14 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic priority Growing global leadership positions Strategic Report

How we Value accretive and sustainable growth create value

Our performance Our activity in 2018 selling its 3.93% shareholding in Norwegian. IAG IAG reinforced its leadership positions in its home confirms it has now fully disposed of its holding in Norwegian.

markets of London, Madrid, Barcelona, Dublin and Corporate Governance Rome with the addition of 48 new routes, including The Group continues in its efforts to be a leading the introduction of LEVEL longhaul routes from Paris airline group with regard to sustainability and in and LEVEL shorthaul routes from Vienna. The Group December 2018, in partnership with Velocys, Shell continued to optimise its longhaul network and and the UK Department for Transport, announced its customer proposition together with its joint business option to acquire a site at Immingham to develop the partners and received approval for its South country’s first commercial scale waste-to-jet-fuel American joint business with LATAM from the project, for which planning permission is expected to Chilean competition authorities, though following be sought in 2019. appeal this remains subject to final ruling by the Chilean Supreme Court. American and IAG also Our priorities for 2019 submitted a joint request to the US Department All the airlines in the Group continue to focus on of Transport for the Atlantic Joint Business’ value accretive growth as they launch new routes antitrust immunity to be extended to Aer Lingus and deepen existing services, up-gauge aircraft, Financial Statements to join the business. introduce new generation fleet and deliver improved connections at hub airports. Longhaul expansion On 12 April 2018, IAG announced that it considered remains focused on the Group’s key markets in North Norwegian Air Shuttle ASA (Norwegian) to be an and South America, but also sees new routes to Asia attractive investment and had acquired a 4.61% and South Africa. ownership position in the airline. This was subsequently diluted to 3.93% after Norwegian IAG will continue to prioritise its assessment of carried out an equity raising. IAG continued to follow consolidation opportunities in Europe to further Norwegian with interest during 2018 and had several enhance its existing portfolio and shape industry discussions with Norwegian regarding a possible consolidation where strategically attractive targets offer for the shares in the company. However, on 24 are identified for growth or entry into new markets. January 2019, IAG announced that it did not intend

to make an offer for Norwegian and that it would be Additional Information

KPI or industry RoIC (%)1 2 A Definition and purpose measure Targeting RoIC is defined as EBITDAR, less adjusted aircraft 16.6% sustainable operating lease costs and less adjusted depreciation, 15.7% 15% divided by invested capital. We use 12 months rolling 13.1% RoIC to assess how well the Group generates returns in relation to the capital invested in the business together with its ability to fund growth and to pay dividends. R Performance The Group's RoIC rose 0.9 points versus last year. The increase reflects an improvement in EBITDAR of 2016 2017 2018 7 per cent on 3 per cent higher invested capital.

Lease adjusted operating margin (%)1 2 A Definition and purpose

15% Lease adjusted operating margin is the Group 14.2% 14.4% operating result before exceptional items adjusted 12.0% 12% for leases as a percentage of revenue. We use this indicator to measure the efficiency and profitability of our business and improvement in the financial performance of the Group. Performance Lease adjusted operating margin remains within our target with a slight improvement to 14.4 per cent. 2016 2017 2018 This was supported by strong revenue and continued focus on non-fuel costs which helped offset the significant rise in fuel costs.

Long-term planning goals A Alternative performance measure R Measure linked to remuneration 2019-2023 of Management Committee 1 Comparative years restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. 2 Alternative performance measures calculations pages 183-185.

www.iairgroup.com 15 OUR STRATEGY CONTINUED

KPI or industry Average growth (ASKs) Definition and purpose measure Capacity in the airline industry is measured in available seat kilometres (ASKs) which is the number of seats available for sale multiplied by the distance flown. 2018 6.1% Planned growth Strong financial performance across all operating companies in the Group has allowed IAG to increase its average growth rate over the course of this Target year’s business planning cycle. We have good 2019‑2023* flexibility in our fleet plans to reduce our capacity 6.0% if needed. per annum

* Last year’s growth target over 2018–2022 was 5% per annum.

Average CAPEX (€m)2 Definition and purpose We track the planned capital expenditure (CAPEX) through our business planning cycle to ensure it is in line with achieving our other financial targets.

2018 Planned CAPEX: IAG recognises the need to continue investing in 2,228 fleet, customer product, IT and infrastructure projects which will all improve our customer offerings and competitiveness in the market. Target In 2018, we increased our forecasted average net 2019‑2023* CAPEX spend for 2019 – 2023 to €2,600 million, an 2,600 increase of €500 million per annum over our 2018 per annum – 2022 forecast. Our 2018 net CAPEX of €2,228 reflects the significant level of fleet acquisitions during the year with 32 deliveries net of 13 sale and leaseback transactions. * Last year’s average CAPEX target over 2018–2022 was €2,100 per annum.

EBITDAR (€m)1 2 A Definition and purpose EBITDAR is the Group operating profit before exceptional items, depreciation, amortisation and c€7,200 impairment and aircraft operating lease costs. It is an c€6,500* indicator of the profitability of the business and of 5,374 the core operating cash flows generated by our 5,022 4,490 business model. This measure is not impacted by the financing structure of our aircraft. Performance EBITDAR increased €352 million versus last year reflecting the Group’s profitable growth as the EBITDAR margin was broadly flat with ASKs up 6.1 2016 2017 2018 2019/23 per cent and contributing to increasing our operating (average cash flows. per annum) * Last year’s average EBITDAR target over 2018–2022 was €6,500 million per annum.

Equity free cash flow (€m)1 2 A Definition and purpose Equity free cash flow is defined as EBITDA before exceptional items less cash tax, cash interest paid and received and cash capital expenditure net of 2,620 €2,500 proceeds from sale of property, plant and equipment 1,964 and intangible assets. It reflects the cash generated 1,801 by the business that is available to return to our shareholders, to improve leverage and to undertake inorganic growth opportunities.

2016 2017 2018 Performance The Group’s equity free cash flow was €819 million lower than 2017, reflecting a €1 billion increase in CAPEX partially offset by higher EBITDA. As expected the Group’s equity free cash flow was below our average long-term planning goal reflecting a high net CAPEX year with 19 aircraft delivered on balance sheet. The Group continues to focus on its capital discipline and flexibility. 1 Comparative years restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. 2 Alternative performance measures calculations pages 183-185.

16 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic priority Enhancing the common integrated platform Strategic Report

How we Efficiency and innovation create value

Our performance Our activity in 2018 proposition and is working with British Airways and In 2018, the Group continued its focus on efficiency Iberia to better tailor their member offerings. Avios also successfully transitioned its travel reward

and cost reduction programmes that also ensured Corporate Governance customer and shareholder value creation. Digital programme into the British Airways Executive Club, innovation has remained a core part of the Group’s allowing members a smoother online experience and focus, continuing the Hangar 51 accelerator even more ways to collect and spend Avios. programmes to attract global talent, making The Group has continued to roll out Wi-Fi strategic investments in promising early stage and connection on its fleet at the same time as emerging technology players in the travel market developing its ‘.air’ portal, which will be able to offer such as ‘deepair solutions’, ‘Cirravia’ and ‘monese’ in-flight entertainment, shopping and Wi-Fi and allow and automating the business above and below the customers to pair their smartphone or tablet to the wing. IAG Cargo invested in its online capability with seatback screen to pay for on-board purchases. upselling functionality, digitisation of documents with eFreight and ePouch to remove the reliance on Our priorities in 2019 paper documents and provide an associated In 2019, IAG will continue to invest in enhancing its weight reduction. It has also introduced customer common integrated platform to provide quality Financial Statements tracking devices for real time updates on location services and solutions across the Group at a faster and delivery. pace and lower unit cost while supporting innovation across the Group. This will ensure ongoing customer The Group has continued to develop capabilities to improvements and operational resilience from the support data customisation and data analytics, Group’s airlines. creating a Group data warehouse allowing storage of the Group’ data to drive operational resilience, efficiency and customer improvements. Avios is using these capabilities to review its loyalty

KPI or industry Adjusted EPS (€ cents)1 2 A Definition and purpose measure Additional Information 12%+ Adjusted earnings per share represents the diluted average growth earnings for the year before exceptional items per annum attributable to ordinary shareholders. This indicator 117.7 reflects the profitability of our business and the core 102.2 elements of value creation for our shareholders. 88.3 Growing earnings indicates that the Group is on the right path to create value for its shareholders. +15.1% R Performance +15.8% We grew our adjusted earnings per share by 15.1 per cent in 2018. Profit after tax before exceptional items improved by 11.2 per cent versus 2017 reflecting a 2016 2017 2018 strong operating profit performance. The adjusted EPS measure also benefited 3.5pts from the share buyback programme.

Adjusted net debt to EBITDAR1 2 A Definition and purpose

Investment Adjusted net debt to EBITDAR is calculated as grade zone long-term borrowings plus capitalised operating 1.8 aircraft lease costs less current interest bearing 1.6 deposits and cash and cash equivalents divided 1.5 by EBITDAR. We use this measure to monitor our leverage and to assess financial headroom through the same lens as financial institutions. R Performance The Group’s financial headroom remained strong in 2016 2017 2018 2018 with adjusted net debt to EBITDAR at 1.6 a slight increase from 2017. Adjusted net debt rose by €596 million to €8,355 million primarily from a reduction in cash reflecting higher CAPEX net of financing, repayment of the perpetual securities and a one-time payment for the closure of NAPS to future accrual.

Long-term planning goals A Alternative performance measure R Measure linked to remuneration 2019-2023 of Management Committee 1 Comparative years restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. 2 Alternative performance measures calculations pages 183-185.

www.iairgroup.com 17 Increasing investment to sustain our growth

“Our plan balances Highlights of 2018 Modernisation of the fleet continued three key priorities – at pace during the year. We took achieving higher delivery of five more Boeing 787s to support our growing longhaul operation network growth, and 2018 also saw the first fuel‑efficient NEOs, seven Airbus A320s and one investing heavily in Airbus A321 – join our shorthaul fleet, our customers and our offering customers a brand new interior, in‑seat power and a more efficient way people and sustaining to fly. Customers also responded well to a financial performance improvements we have made to existing aircraft, not least on Boeing 777s for the long-term.” operating from Gatwick and Boeing Alex Cruz 747s where refurbished cabins include Chairman and Chief Executive Officer new seats and new in‑flight of British Airways entertainment systems. In the air and on the ground, our overall British Airways statistics These achievements came in a tough year. We faced rising fuel costs, plan is to continue to invest in the areas intense competition, difficult weather that our customers value most. New World Traveller catering was introduced Lease adjusted RoIC and air traffic control strikes. The reliability of our operation was affected during the year, with satisfaction scores operating among longhaul customers rising as a margin (%) by the ongoing Rolls‑Royce engine issues impacting our Boeing 787 fleet. In result. New Club World catering has September, we suffered a criminal data now been rolled out across the network 15.6% 17.3% breach which caused great concern to and we launched upgraded Club Europe vly +0.8pts vly +1.4pts us as we take the protection of data food on shorthaul sectors in September. very seriously. We are sorry for the On the ground we opened new lounges Punctuality Fleet disruption this caused our customers. at JFK, Rome and Aberdeen and The team has leveraged the expertise of upgraded facilities at 11 shorthaul strategic global partners to help ensure airports to ensure that, from end‑to‑ 76.0% 293 early detection of future threats. end of their journeys, customers enjoy vly ‑4pts vly +0 aircraft a premium service. Despite these challenges, our revenues have held up, increasing 5.7 per cent We have used technology 2018 was the second year of our versus last year. Combined with a developments to enhance our extensive programme to turn British continued tight control of costs, the customers’ experience and reduce pinch Airways into a truly customer‑focused closure of legacy pension schemes and points in their journey. Improvements to airline. The plan is well underway and I the completion of our restructuring ba.com have streamlined the booking am glad to say we have already seen the programme, we achieved an operating process, increasing the number of benefits flowing through in ways our profit of £1,952 million before customers who book with us directly, customers can clearly see, with our Net exceptional items and a return on and we have delivered additional Promoter Score (NPS) up compared invested capital (RoIC) of 17.3 per cent. functionality on our app, allowing our with 2017. customers to do more through their From this solid base we are focusing mobile phones. In the US, we were the Yet again we achieved stronger profits hard on our three key priorities – first airline to introduce biometric during the year, creating a solid achieving continued network growth, boarding without the use of a boarding foundation for further growth over the investing heavily in customers and pass or passport with trials conducted in next five years starting in 2019, British people and sustaining our strong Orlando and Los Angeles. This Airways’ centenary year. As we financial performance. technology has enabled us to board an approach this important anniversary, Airbus A380 in half the time, reducing it was great to announce that we had queuing time for our customers and raised a record £20 million for Flying creating a more stress‑free journey. Start, our charity partnership with Comic Relief, a full two years ahead of schedule.

18 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 We continued to build on our network In shorthaul our priority is to capitalise We are increasingly keen to trial new and schedule in London, two core on our strong position in London. That digital technologies. We are testing Strategic Report strengths of our business. We are means using dynamic peak summer chatbots to assist our contact centres number one at Heathrow and London scheduling to increase seat factors at and robot process automation where City and number two at Gatwick, by Heathrow, expanding our Gatwick it can help customers and our people. seat share. Shorthaul seat factors rose presence by using slots acquired in 2018 Elsewhere we will deploy Mototoks – by three points in the summer to their full potential and expanding at the remote controlled aircraft tugs that compared with 2017, with newly London City by adding four new aircraft we have used so successfully in acquired slots at Gatwick performing to the fleet from 2019. shorthaul to increase efficiency at very well. We now have the flexibility to departure time – on longhaul aircraft Significant investment in customers Corporate Governance fly to more leisure destinations, and we will extend trials of biometric and our people operating a dynamic schedule more boarding to other US stations, including closely matched to customer demand. Our customers and our people are a key Houston and New York in 2019. New longhaul routes were launched in focus and as we start our centenary year, you will see a significant increase But we cannot hope to deliver for 2018 to places such as Durban, the our customers without the right people Seychelles and Nashville. in investment in both. Indeed, to underline that commitment we have with the right training. Our people Achieving higher growth increased our planned investment in are critical to delivering the best We already offer more choice of improving the customer experience customer experience. destinations than any other UK airline over the next five years from the This year we will recruit some 3,000 and we are determined to strengthen £4.5 billion previously announced people, of which around 2,000 will be our position by growing faster, offering to £6.7 billion. cabin crew. All of them will receive an Financial Statements more destinations and frequencies Benefits of this increased investment extra five days training, while service across the world. To reflect that will continue to show throughout 2019. training for the remainder of our ambition we have increased our A new Club World seat, with all‑aisle 28,500 front‑line colleagues will also projected compound annual growth access, gate‑to‑gate entertainment, be increased. rate over the next five years to 3 – 4 more stowage and greater privacy, At Heathrow our newly launched First per cent, up by 1 percentage point. will be launched on our first Airbus Contact Resolution programme is We operate the most comprehensive A350 in the second half of 2019 and transforming how our people interact network between Europe and North rolled out across the longhaul fleet in with customers in the terminal, giving America. Following new route the coming years. We will upgrade the them the skills and tools to resolve announcements to Pittsburgh and product in both First and World problems and issues at first contact. For

Charleston, we will soon serve 34 Traveller Plus cabins where customers example, this will increase our rebooking Additional Information destinations, consolidating our position will enjoy improved catering and capability when services are as the largest longhaul carrier into North amenities in the first half of 2019, disrupted, so that colleagues can America by points served. We have had including better food with more choice provide customers with the kind of great success in opening routes to and extra comforts, such as pyjamas, consistent service and personal markets such as Austin, New Orleans amenity kits, quilts and larger pillows. attention that makes all the difference and Nashville and will look for further New in‑flight entertainment systems will at stressful times. opportunities in the US. As we develop also be embodied to more aircraft. Wi‑Fi the longhaul network further, our will be fully installed on 80 per cent of Sustaining our financial performance relationship with joint business partners our longhaul and all of our shorthaul We are determined to keep growing will remain critical in offering customers aircraft by the year end. Lounge and investing in our business. But those better frequency and easier connections renovations at JFK (Club), ambitions depend on the third critical in the markets we serve. 2019 will see us San Francisco, Johannesburg and part of our plan – our need to sustain launch new services to Islamabad and Geneva will be completed this year our strong financial performance for Osaka as we continue to expand our and, as we grow the network, we the long‑term. presence elsewhere in the world. will launch new facilities, all the time Maintaining our discipline on cost improving the food and beverages Thanks to its range, capacity and cost and capital is absolutely vital if we are we offer in existing lounges. efficiency, the Boeing 787 allows us to to meet our targets to achieve a 15 per launch new routes quickly and Technology will play an increasingly cent lease‑adjusted operating margin effectively. We have a further 12 Boeing important role in ensuring a smooth and a 15 per cent return on invested 787s on order to bolster our current experience for customers and we will capital over the economic cycle. fleet of 30 aircraft. The Airbus A380 is continue investing significantly in the Meeting these stretching targets will be helping us cement our position in key digital experience. For instance, we want challenging but we will make sure British cities, flying to nine airports worldwide to further improve ba.com and the app Airways continues to thrive. where demand exists. In sought after to make every step of the journey – At the end of another strong year, markets like New York we are using from booking a flight to returning home where we demonstrated the resilience aircraft with a higher proportion of – as easy and seamless as possible. of the business in the face of some premium seats. The Airbus A350 will tough challenges, I am confident that we arrive in 2019 and will be a great can indeed meet those targets. I look replacement for our retiring Boeing forward to an exciting 2019 and, 747s, offering the same capacity but especially, to celebrating our centenary with a much‑improved product, greater year with colleagues across the business customer comfort and greater fuel and customers around the world. efficiency.

www.iairgroup.com 19 Striving for excellence through continued transformation

efficient Airbus A320neos into the fleet “Our transformational and continued to retrofit our existing Plan de Futuro, now in Airbus A320s with in‑seat power and slimmer seats for greater its phase 2, is clearly customer comfort. focused on achieving Revenue performance was strong, passenger unit revenues and load excellence right across factors were up across the business. our operations, Point of sale grew particularly well in Spain and North America, partially although there is still offsetting a weaker performance in work to do I am fully South American markets, notably Argentina and Brazil. confident in the Several recent innovations are Luis Gallego Martin supporting this revenue growth. The Chairman and Chief Executive performance of our Officer of Iberia full roll out of Premium economy in team.” the longhaul fleet has been extremely successful, meeting customer Iberia statistics 2018 – striving for excellence expectations and achieving amongst 2018 was a good year for Iberia. We the highest NPS levels of our products. were particularly pleased to continue Equally we have been investing in our Lease adjusted RoIC making such good progress with phase Premium product on the ground, for operating 2 of the Plan de Futuro despite facing instance refurbishing our Premium margin (%) increasingly intense competition in the Lounges in Madrid and continuing to marketplace. Our financial performance offer new digital solutions in all our was in line with the growth targets we points of contact. 10.0% 13.2% set out for IAG investors in November vly +0.4pts vly +1.0pt 2017 at our Capital Markets Day. We We added a new fare structure allowing recorded an operating profit of €437 customers to select the level of Punctuality Fleet million, up €61 million from last year, and “bundling” of services closest to their a return on invested capital of 13.2 per needs, in particular the launch of the 87.2% 104 cent, up by 1 point, thanks to continued new Optima longhaul fare has been vly ‑2.8pts vly +6 aircraft tight control of our costs and good highly successful amongst our target performance of passenger revenues, segments (“Trade up” and especially in our longhaul and at Iberia “premium” segments). The transformation of Iberia is Express, which compensated for the We have worked closely with continuing under our comprehensive fuel price increase and negative British Airways and IAG to improve Plan de Futuro, first launched five years foreign exchange. distribution, with more than 600 ago. In the first phase we focused on Capacity and revenue growth agencies now signed up to our new returning the airline to profitability. Now, model using new distribution channels. under phase 2, we are concentrating on We increased overall capacity by 7 per These display more pricing points achieving excellence across every cent with expansion across our network. compared with the industry’s traditional aspect of our operations. In longhaul we launched services to San Francisco, embedded our new Premium channels, offering our customers greater While the work we have done to date is Economy class and took delivery of two choice and flexibility. extensive, it’s clear that we have a long new generation Airbus A350‑900s. We Continued cost control way to go to achieve our ambitions for also passed a major milestone in our the airline. That means 2019 will again be We continue to bear down on cost efforts to build a strategic alliance with as part of phase 2 of Plan de Futuro. a demanding year for us, with a lot of LATAM, with the Chilean Free hard work still to do. A prime focus is to achieve a market Competition Defence Court approving leading cost per available seat km But we are looking ahead with cautious our proposed joint business in October (CASK) excluding fuel. To do optimism, convinced we can take 2018, though following appeal this so we are concentrating on building advantage of our cost base to gain an remains subject to final ruling by the a more efficient fleet and achieving increasing competitive edge and sustain Chilean Supreme Court. economies of scale in our supply chain, our financial performance, while In shorthaul there was good growth working with GBS, IAG’s centralised continuing to invest heavily in our too as we used Iberia Express to business services headquartered brand, our customers and in key strengthen our network, adding four in Krakow, Poland. digital projects. new destinations. We brought two fuel

20 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 People are one of the fundamental Wider transformation Following the success of our cabin Strategic Report pillars of our success and vital to the 2018 was also a positive year for the modifications on Airbus A320 aircraft, continued transformation of Iberia. transformation of our non‑airline we will retrofit our Airbus A321s with the Colleagues across the business deserve businesses. In Handling we continued new slim seating. This will add an extra great credit for what we have achieved focusing on increased efficiency and 20 cabin seats, allowing us to boost in these years of transformation. greater cost discipline through the revenue while still offering customers more comfort and greater legroom. In August 2018 we reached a labour launch of its own transformation agreement with our pilots and aim to programme, Go Up. A number of important customer reach similar balanced settlements with Maintenance is making good progress projects will come to fruition during the other collectives within the business in on a road map laid out under IAG’s year, helping us to tailor our value Corporate Governance the months ahead. Our intention Maintenance Strategy Project to proposition to target customers and through these agreements is clear. We improve the profitability and overall transform the service we deliver in the want to pursue our growth plan for sustainability of the business. The early air and on the ground. In the next 12 Iberia within a work environment that is signs are good and new contracts months we should be in a position to both stable and fair. signed with other airlines point to the understand our customer needs more clearly and measure our success in We also launched Plan Person@ during opportunities that lie ahead as it meeting them more accurately. Some the year, to reinforce our commitment strengthens its position. examples of these include working to IAG’s diversity principles, and to 2019 – rising to the challenge towards the transition of our catering provide a platform for people across the The year ahead looks set to be a supplier in Madrid, launching Wi‑Fi on business to have a real say on our future challenging one. Increasing our shorthaul fleet and improving the and a real chance to be heard. competition, fuel price volatility and boarding experience in short and Financial Statements Investing in customers political uncertainty in some of our medium haul flights, by focusing on the Customers are, of course, absolutely most important markets will main pinch point which is the removal of key too and 2018 saw us intensify our undoubtedly test us. hand bags at the gate. We will also be offering members of our loyalty investment in product, brand and digital But we look at these challenges as a programmes better incentives and services to support our offer. chance to continue the process of even greater value. We fully refurbished our two VIP change that has been so important to lounges at Madrid Barajas airport, Iberia over the last five years and an The digital transformation of our improved in‑flight entertainment and opportunity to consolidate the gains business will also accelerate in 2019. connectivity services and upgraded our we have made. This will help us improve the travel experience with greater connectivity, customer relationship management We have created a very efficient cost Additional Information improved boarding, in‑flight systems. Changes we have made are base, and subject to the renewal of experiences, and customised options for resonating with customers and we were our labour agreements and market individual customers. Iberia will provide pleased to see it reflected in our Net conditions, we should be well placed new digital services and hyper Promoter Score results. However the to continue on the path of personalised experiences via mobile, increased European Air Traffic Control profitable growth. industry delays experienced have had a social and virtual assistant channels negative impact on our overall NPS. In New services, new fleet (such as voice in Amazon Alexa/Google spite of the difficult circumstances, we A priority will be to build our longhaul Assistant, or Iberia Chatbot), also continue delivering high punctuality and business with a particular focus on core enhancing interactions through were thrilled to win a fourth Skytrax markets in Latin America. Daily services traditional channels for those customers star, confirming that Iberia’s product to Montevideo and Rio de Janeiro are who need it. We will generate new and customer service are regarded as planned and we will increase flights to advanced analytics capabilities in our being right up with the best comparable Bogota to build our presence in data excellence centre. As part of our airlines in the world. Despite this Colombia. To consolidate our position transformation priorities, Iberia will fantastic external endorsement, we in Central America we will increase continue turning legacy systems into increased investment in our brand to frequencies to Mexico and increase service platforms under the principles strengthen our leadership position in the capacity on routes to Guatemala and of data protection regulations and premium segment in Spain and to Salvador. Elsewhere in the world we will cybersecurity. Open innovation and reinforce our standing in Latin America build on our still relatively new, but start‑ups will keep on helping us to and in our core European markets. quickly maturing position in the Asian increase digitalisation. market, adding more summer flights Digital technology will play an increasing Outlook to Tokyo. role right across our business in the It’s been an eventful but successful five years ahead. To reflect its importance We will add new short and medium haul years for Iberia. in terms of our operations and our services to strengthen our position in We are by no means complacent customers, we created a new team Europe. This effort will see us increase about the progress we have made to dedicated to innovation, digitalisation services to the Canary and Balearic date and are always aware that there and the management of Plan de Futuro. Islands as well as to major European is more we can do to keep transforming The team has been tasked with thinking cities such as Brussels, Berlin and the business. in completely new ways about how we Hamburg, helped by the addition of two use digital in three contexts – within the new aircraft. We are determined to step up our efforts to achieve excellence across the workplace, in relation to our customers Our fleet renewal plans will gather pace business and are confident we can do and in how we manage our crews, in 2019, bringing efficiency benefits as just that. maintenance and handling. well as the chance to increase revenue. Four more Airbus A350‑900s and six We are ready for the challenges that lie Airbus A320neos – respectively 30 per ahead and, as I have said, determined to cent and 17 per cent more efficient than turn them into opportunities for Iberia. the aircraft they replace – will be delivered during the year.

www.iairgroup.com 21 Delivering solid financial results in a challenging environment

save time and want flexibility and “Vueling again delivered Family fares. We also introduced solid financial results, unbundled Space Flex products that give customers more legroom, despite facing a very amongst other benefits. disruptive European Air 7. We invested in the digital innovation that underpins our transformation. Traffic Control (ATC) Our digital, innovation and data environment” science teams – now more than 400 people strong, including development partners – really delivered in 2018. Vueling was the first airline to allow customers to save boarding passes in Google Pay. Our customers can now Javier Sanchez-Prieto check their Vueling flight status with Chief Executive Officer of Vueling Amazon Alexa and receive their tickets through WhatsApp. Biometric Vueling statistics 2. We expanded through “smart” boarding will soon be a reality. We growth. 2018 saw us return to made significant leaps in how we growth. We increased asset utilisation leverage data and use advanced Lease adjusted RoIC (+4% block hours per aircraft per day analytics to solve business problems operating vs. 2017), densified our network such as ATC forecasting, demand margin (%) (+4% weekly departures per route) forecasting, dynamic pricing of and managed seasonality. ancillaries, airport queue management, 3. We made our processes more and process automation. 11.8% 13.3% consistent and reliable. We vly ‑1.0pts vly ‑0.1pts Continuing the Vueling NEXT implemented new boarding groups transformation and minimised queues, especially in Punctuality Fleet Barcelona. We expanded our self‑ In 2019 we will continue our NEXT check‑in kiosks and bag drop transformation programme including locations in key airports. growth and stabilisation with an evolved 68.4% 121 operating model, aiming to provide the 4. We invested in our operation to vly ‑11.5pts vly +16 aircraft number one low‑cost carrier customer address ATC challenges. Our experience, better integrating our operational performance was solid network, operations and maintenance. and in line with our peers although Overview As a leading low‑cost carrier, we ATC disruptions are sadly becoming In 2018 Vueling delivered solid financial continue strengthening our cost more frequent. We are actively taking results, despite the worst European discipline and we keep driving more steps to mitigate their impact on our air traffic control (ATC) operating innovations in our operation and our customers and our business by environment in recent history. We customer experience. reducing the complexity of our routes, continued to transform and modernise isolating routes from problematic Conclusion our customer offering while making ATC regions, and refining where further progress on our Vueling In 2019 we celebrate our 15th we base our aircraft, crews and NEXT transformation. anniversary as a company, which gives maintenance capabilities. us occasion to reflect on how far we 2018: A challenging but 5. We continued transforming our have come. We are proud to now serve productive year customer experience. In 2018 we more than 32 million customers each In 2018, we invested and strengthened made important progress towards our year, reaching 130 destinations, over our company in several areas. goal of providing the best customer 3,500 direct employees and 121 aircraft. experience amongst European 1. We delivered on our market strategy. At Vueling, we see the challenging low‑cost carriers. We enhanced our This strengthened our positions in operating environment as an retail offering, refreshed our cabins, key markets by 3 points of market opportunity. Our DNA is digital and started installing in‑seat power and share in Barcelona and Spain‑Canaries innovative. We have a clear vision and on‑board Wi‑Fi and introduced a and 4 points in Spain‑Balearics. We managerial discipline to guide our disruption self‑management system. also maintained capacity discipline growth. We are committed to our and flexibility to quickly adjust to 6. We changed our product offerings to customers, employees and delivering future headwinds. better meet customers’ needs. We returns and we have the right launched two new fare types, momentum to continue improving our TimeFlex for passengers who need to operational reliability, customer experience and financial returns.

22 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 An investment case Strategic Report for growth Corporate Governance

advantage of Dublin places Aer Lingus “2018 has been a year at a significant advantage to other of record operating carriers serving the transatlantic market. performance and During January 2019, we launched a new modernised brand, to reflect the return on invested airline we have become and the value proposition we offer, while faithful to capital, demonstrating the brand heritage and the proud legacy

the investment of 82 years of successful operations Financial Statements serving Ireland. Throughout 2019 we will case for further continue to invest in product including profitable growth.” providing complimentary alcohol during dining on our transatlantic services and a new free social media Wi‑Fi Stephen Kavanagh package for all guests travelling in Chief Executive Officer of Aer Lingus our economy cabin. There will be further fleet growth and Aer Lingus statistics infrastructure at Dublin and will also provide significant social and economic significant investment in brand spend and product changes. We will introduce

benefits for a range of stakeholders Additional Information in Ireland. AerSpace, a differentiated product on Lease adjusted RoIC our shorthaul network, self‑service operating The virtuous model technology in areas such as baggage margin (%) The ambition of Aer Lingus has tracking, and will launch direct services been leveraged to create a compelling to Minneapolis and Montreal. New 16.8% 26.8% competitive position. Our value model technology long‑range Airbus A321LR vly +0.6pts vly +3.8pts is demand‑led, and centred on cost, aircraft will enter the fleet during the product and service; an operating summer season, unlocking new gateway Punctuality Fleet1 model that is simple by design. We opportunities to North America, believe it has been a virtuous model improving on‑board product and since IAG acquired Aer Lingus, with delivering reduced costs. 74.0% 56 over 35 per cent growth since 2015. Conclusion vly ‑7.4pts vly +4 aircraft Reduced unit costs have enabled investment in growth and price Aer Lingus remains committed to its competitiveness, with retained margin successful value model strategy Overview increases delivering a record return which continues to create sustainable In 2018 we continued our mission to on invested capital. value for the Group. We will continue be the leading value carrier across to develop and progress our the North Atlantic, enabled by a We are a guest‑focused business and at opportunities for growth, remaining profitable and sustainable shorthaul the heart of our virtuous model is Net committed to delivering high levels of network. This is supported by a guest Promoter Score, which was maintained guest satisfaction and operating focussed ethos and brand, and a at industry leading levels through 2018. performance. As I step down as Chief digitally enabled value proposition. Our ‘Voice of Guest’ surveys are integral Executive Officer I look forward to We believe that Aer Lingus is delivering to the design and delivery of product continuing on the Board of Aer Lingus on this ambition, with a compelling and service, with demand‑led as non‑executive director and working position in the markets we serve, investment decisions made in line with Sean Doyle as he transitions into creating opportunity for further with our value principles. Key to Net his new role as Chief Executive Officer. profitable growth. Promoter Score is our operational and I would like to thank all my colleagues on‑time performance, for which we are for their support during my time in Aer Aer Lingus achieved a record best‑in‑class at Dublin and we have Lingus and wish Sean and all of my operating result in 2018 and the received external validation with a colleagues continued success. Group’s highest return on invested Skytrax 4‑star ranking and APEX capital, whilst maintaining high levels 5‑star ranking. of guest satisfaction. We believe this strong operational and financial A competitive product and brand performance is sustainable, and the Aer Lingus has a competitive product opportunity remains for Aer Lingus to and a well‑positioned brand. Together grow Dublin as a major hub connecting with a network which has depth, Europe and North America. This will be breadth and connectivity, and the enabled by investments in airport quality of our partners, the geographical

1 Includes 4 Boeing 757 and 2 Avro RJ85 on wet lease.

www.iairgroup.com 23 Expansion of IAG’s new low-cost brand

LEVEL longhaul network LEVEL shorthaul network

Passengers

888 thousand

Destinations 25

Aircraft 9

More than an airline Following the appointment of its CEO Looking forward LEVEL is not a traditional, vertically in September 2018, LEVEL has been In 2019, LEVEL will invest in integrated airline business. Instead, the transforming from its project‑based consolidating and enhancing its LEVEL model separates the production structure to a fully constituted commercial model and customer and operational aspects from the business. 2019 will see continued experience, enhancing its commercial and customer facing growth of the LEVEL operations and ancillary product portfolio, making elements of the business. As a result, further development of the customer improvements to the flylevel.com LEVEL is agile and able to rapidly take offer, ancillary product portfolio and website with a mobile first focus advantage of new opportunities as it commercial model to support and development of the LEVEL app. did in 2018 in Paris and Vienna. further expansion. LEVEL will also take delivery of two The LEVEL brand is fresh and modern A year of growth additional Airbus A330‑200 and is integrated into all elements of LEVEL added two additional Airbus longhaul aircraft and three new the customer experience. A330‑200 aircraft to its operation in Airbus A320‑200 shorthaul aircraft. 2018 with the launch of longhaul New longhaul routes will launch from Overview services from Paris Orly flying to Barcelona to Santiago de Chile in March 2018 was LEVEL’s first full year of Point‑a‑Pitre, Fort de France, Newark 2019 and to New York JFK in July 2019. operation from its base in Barcelona and Montreal. It also introduced four LEVEL’s shorthaul operations will also and also saw significant expansion for Airbus A321‑200 aircraft, extending the grow in 2019 with its new shorthaul base the brand with the launch of longhaul LEVEL brand to shorthaul operations in Amsterdam opening in the summer. services from Paris and the from Vienna, flying to destinations development of a shorthaul low‑cost across Europe including London, Paris, operation from Vienna. Barcelona, Ibiza and Dubrovnik. LEVEL was designed to more effectively Continued positive performance target price sensitive leisure customers. Strong customer demand and continued It leverages the scale and capability of improvement in the cost base allowed IAG to deliver a high‑quality product at LEVEL’s Barcelona operations to the lowest possible cost with a service maintain positive underlying profit model that puts the customer in control performance in its first full year of of their flight experience. operations, while the transformation of the former OpenSkies operation in France has already seen significant non‑fuel unit costs savings.

24 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 IAG PLATFORM

Delivering quality and efficiency Strategic Report while enabling Group-wide innovation Corporate Governance

The IAG Platform is now a well‑established part of the Group. It allows IAG to achieve revenue and cost synergies that the operating companies could not attain alone and provides a plug and play platform new operating companies can join and exploit. The Group has already extracted significant value from the IAG Platform with opportunities to further enhance and support innovation.

IAG Platform Financial Statements

MRO / Fleet IAG Connect Digital

The IAG Platform includes the IAG continued to partner with world‑class efficiency and constantly evaluates Cargo and Avios businesses; IAG GBS, global providers whose expertise is opportunities for further cost savings. which delivers IT, procurement and helping support a resilient and scalable IAG Connect and .air portal finance support; IAG Connect, which IT platform for the Group. The focus has is responsible for the Group’s in‑flight also been on enhancing the Group’s Throughout 2018 the embodiment Additional Information connectivity strategy and in‑flight disaster recovery service which has of the Group’s aircraft with Wi‑Fi e‑commerce platform; and Group included mitigating the obsolescence of capabilities continued. IAG Connect initiatives in maintenance and the technology stack and securing a rolled out the ‘.air’ portal with Iberia digital innovation. stable, workable plan for the migration and LEVEL on their new aircraft of critical core business applications. deliveries (Airbus A350 and Airbus Global Business Services (GBS) A330, respectively), whilst also Leveraging the benefits of an efficient In 2019, IT will continue to progress enhancing the .air portal on existing and competitive platform. toward its target operating model, British Airways and Iberia Wi‑Fi providing flexible and scalable solutions equipped longhaul aircraft. The portal IAG GBS was established in 2014, across the Group at a faster pace and following which it was engaged in a allows for a consistent customer lower unit cost, while also improving experience regardless of the aircraft, period of fast‑paced start up activity ongoing operational resilience. centralising the core finance, IT and while the airlines can tailor the offer procurement functions of certain parts Procurement to align with their brand and individual of the Group, starting with British In 2018, Group Procurement launched customer propositions. The Group Airways and Iberia and rolling out to a new procurement platform that has portal has been installed and operates Aer Lingus and Vueling. In 2018, GBS streamlined more processes and driven on all newly connected aircraft across has focused on consolidating the further synergies for the Group. New the Group. considerable achievements from those digital tools, such as the Ariba Network 2019 will continue to be a year of first years while continuing to drive and Hoovers, have been deployed to delivery for IAG Connect with the team further improvements across the Group provide a more robust and automated already working with Aer Lingus and in areas such as supplier management, approach to supplier relationship British Airways to define the product automation of processes and management. Non‑fuel cost savings of that will be flying on Airbus A321 and operational resilience. more than €250 million were delivered Airbus A350 aircraft in the second half across the Group in 2018. of next year. IAG Connect will also Group IT Over the coming year Group commence the rollout of shorthaul In 2018, Group IT’s focus on cyber connectivity on British Airways, Iberia security was brought to the fore Procurement will continue to focus on streamlining the supply base to progress and Vueling aircraft, whilst continuing following the malicious attack on British work with the Group to enhance the Airways’ customer data. The team has towards stability and effective Corporate Social Responsibility with the ‘.air’ portal with new features, partners leveraged the expertise of strategic and services. global partners to help ensure early Group’s partners. It will continue to detection of future threats through an develop its key supplier relationships to enhanced 24/7 Security Operations deliver value to the Group in a Centre. Relevant testing and scans for professional manner. See page 27 for more information on Avios all operating companies to support Finance Payment Card Industry (PCI) GBS Finance continues to focus on the See page 28 for more information compliance and fulfil the Group’s on IAG Cargo simplification, harmonisation and requirements for implementation of the automation of processes to improve General Data Protection Regulation See page 29 for more information on Digital (GDPR) has been deployed. IT has

www.iairgroup.com 25 IAG PLATFORM CONTINUED

As a result of some technical challenges The focus in 2019 for the Group MROs arising on the embodiment of certain is to deliver the next set of targets to aircraft, IAG’s target to install 90 per further strengthen our operations cent of its aircraft with Wi‑Fi and improve competitiveness of connectivity in 2019 is now expected to additional activities: be reached by the second half of 2020. • outsourcing of certain inventory Maintenance, repair and overhaul management and repair activities (MRO) and Fleet for our fleet In 2018 the Group made significant • continuing the transformation progress in the transformation of its of our wide body airframe MRO activities through the execution of maintenance division the strategy defined to ensure • consolidation of suppliers competitiveness in cost, quality and in line maintenance operational performance. The main • new repair capabilities in our engine achievements include: shop to further differentiate from the • transformation of the engine shop and market and add value to the Group narrow body airframe maintenance • continued optimisation of our divisions which are now more supply chain competitive facilities providing In Fleet, the Group has further services for both Group airlines as well progressed the harmonisation of as external customers common fleets by ensuring • optimisation of inventory the commonality of maintenance management capabilities which have programmes and modification policies allowed us to reduce inventory across our airlines. In 2019, further • optimisation of the supply chain progress will be made with the spend jointly with GBS centralisation of some of the Group's Procurement including further engineering services. outsourcing of products

Aircraft Fleet Number in service with Group companies

On Off balance Changes balance sheet Total Total since sheet fixed operating December 31, December 31, December 31, Future assets leases 2018 2017 2017 deliveries Options Airbus A318 1 – 1 1 – – – Airbus A319 21 40 61 64 (3) – – Airbus A320 82 159 241 218 23 71 128 Airbus A321 27 29 56 51 5 21 – Airbus A330–200 9 13 22 17 5 2 – Airbus A330–300 6 10 16 15 1 2 – Airbus A340–600 11 6 17 17 – – – Airbus A350 2 – 2 – 2 41 52 Airbus A380 12 – 12 12 – – – Boeing 747–400 35 – 35 36 (1) – – Boeing 757–200 – – – 3 (3) – – Boeing 767–300 – – – 8 (8) – – Boeing 777–200 41 5 46 46 – – – Boeing 777–300 9 3 12 12 – 4 – Boeing 787–8 11 1 12 9 3 – – Boeing 787–9 9 9 18 16 2 – 6 Boeing 787–10 – – – – – 12 – Embraer E170 6 – 6 6 – – – Embraer E190 9 7 16 15 1 – – Group total 291 282 573 546 27 153 186

As well as those aircraft in service the Group also holds 5 aircraft (2017: 5) not in service.

26 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Avios: the Centre of Excellence Strategic Report for Loyalty in IAG Corporate Governance

“2018 saw the fourth Avios with over 1,000 retailers on the eStore. Card linked collection, which consecutive year of allows members to register any credit cards to automatically collect in store, growth at Avios since has made collection easier and unlocked its formation. We new collection opportunities. expect this trend to The Pay with Avios product, which allows members to use their Avios to

continue throughout discount airline fares, has grown and Financial Statements now accounts for 30 per cent of total 2019 as we invest in Avios redeemed. During 2018 we new products, expanded this product across a number of our oneworld partner airlines to give technology and loyalty members more choice, as well as Andrew Crawley and data capabilities.” offering them the ability to spend more Chief Executive Officer of Avios Avios to gain larger discounts on the ticket price. Avios statistics product and to obtain travel and leisure experiences. Avios were used on Avios continues to invest and expand its digital capabilities. A new British 8 million flight bookings in 2018. Additional Information Airways Executive Club rewards app Active members Avios issued Key successes in 2018 was launched, which gives members in 2018 In simplifying its offering, Avios moved the opportunity to engage with the UK based members from the Avios currency through everyday use, 8.7 million 115.1 billion Travel Rewards Programme into the highlighting relevant collection and vly +6.1% vly +10.7% British Airways Executive Club, redemption partners. Within the Group, transferring over 27 billion Avios points Avios sees potential to leverage IAG’s across two million accounts. The move investment in Monese, the 100 per cent Avios redeemed brings more collection and redemption online bank which allows customers to in 2018 opportunities and better online account open a full UK current account instantly management through BA.com. on their mobile, to give breadth to its billion 86.4 Avios delivered strong issuance growth financial services portfolio. vly +4.2% during the year both from airlines and Future finance cards, with the latter due to In 2019, Avios will continue to focus on increased credit card penetration and Overview expanding its data capabilities through higher member spend. In the UK, we the integration of Group data sources. Members remain at the heart of what focused on enhancing our partnerships This helps better segmentation and we do at Avios. By increasing the including our relationship with American communication for Avios members, with opportunities for members to collect Express, where 2018 was a milestone more personalised and targeted content and spend our currency, we can drive year for Avios issuance. There has also relevant to them. In 2019, Avios will also better engagement, both within IAG been strong performance across complete its transition to a single loyalty with our partners, and ensure loyalty other sectors such as retail and platform for the currency. acts as a greater differentiator in travel including key partners Tesco members’ purchasing decisions. Avios and Marriott. We will also further develop a number is constantly analysing and adapting its of Group‑wide strategies to improve In the USA, Avios has launched new products to strengthen propositions and member satisfaction and engagement credit cards with Chase for both Iberia we are investing in technology to make with the Group’s loyalty programmes. Plus and Aer Club members. In Asia, collection and spending of Avios This will be supported by leveraging DBS Bank, which is the largest bank in simpler. We are also exploring ways of Avios’ member insight and analytics, to South East Asia, is offering members connecting loyalty and payment to release more new member features on a of the DBS$ scheme the opportunity deliver more convenience for members. regular basis. to convert their points into Avios, with a Members can already collect Avios strong conversion rate. when they fly, when they spend on their Avios continues to simplify the way credit cards and when they shop with members can collect on their everyday our retail and travel partners or in our spending. The online eStore, featured on online eStores. They can use their Avios the IAG airline websites, has increased in to fly on IAG, oneworld and Avios popularity. Members in the UK, France, partner airlines, to obtain discounts on Italy, Spain and Ireland can now collect airline fares using the “Pay with Avios”

www.iairgroup.com 27 IAG CARGO Delivering strong results

such as London – Nashville. “In a busy year, Enhancements to the PartnerPlus characterised by alliance programme continued to extend our global reach. 2019 will see the changing market addition of Pittsburgh to the network conditions, IAG Cargo and direct flights to Osaka and Islamabad, offering new opportunities delivered strong results for customers. through business During 2018 we launched the Critical Service Centre, a customer service team investment and growth dedicated to serving our highest priority in premium products.” product, Critical. The team comprises of emergency solution experts providing a single point of contact for emergency Lynne Embleton shipments, whilst unlocking revenue Chief Executive Officer of IAG Cargo potential. We also expanded Critical to accept pharmaceutical shipments, Overview In 2018 we undertook the UK's first offering a solution to the emergency A combination of overall positive market airside trial of a self‑driving vehicle at medical shipment market. conditions across all regions and a focus London Heathrow, to explore the future Our time‑critical premium products on premium products led to a record of autonomy in airport logistics. We also played an important role in responding financial performance for IAG Cargo. began early stage trials of incorporating drone technology for the first time in an to events around the world; we Throughout 2018 we moved key airside cargo warehouse environment. transported vaccines from India to consumer and industrial goods across Venezuela in response to a diphtheria our global network and product suite; Investment in an agile web development outbreak, and we moved vast quantities transporting essential pharmaceuticals team underpinned our commitment to of fresh produce – including 30,000 via Constant Climate, urgent machinery deliver a seamless online experience. heads of lettuce from the US – in parts with Critical and supporting large Customer feedback, frequent website response to shortages across Europe project movements with our Perform improvements and new booking during the abnormal summer heatwave. product. We have moved aircraft upgrade functionality all contributed to As the logistics partner for the British parts from the UK to China, whisky rapid growth in online revenue in 2018. Museum, we transported ancient from Japan to the US, fresh fruit from IAG’s Hangar 51 global innovation artefacts with our Secure product for Latin America to Europe, and flower programme included a cargo specific the ‘I am Ashurbanipal: king of the garlands from India to Canada. category for the first time this year. We world, king of Assyria’ exhibition. Truly understanding what we are now working with innovative carry has become embedded in start‑ups in areas of wearable voice Our continued work with key industries our business and further enhances communications and real‑time analytics and institutions around the world our customer proposition. and data visualisation to explore how underpins the significant role we play in global trade. After a strong start to the year, market these technologies can improve growth began to slow during 2018. operational performance. Conclusion Overall, market conditions were Infrastructure investments continue, 2018 was a successful year for IAG favourable, particularly in Asia Pacific, building a new Constant Climate Cargo which saw advances in our Europe and the UK and Ireland. Centre in Madrid and progressing products, route network and digital Premium products performed well. construction of our new premium capability. A strong product portfolio Constant Climate revenue grew by 9 per freight building in London. and agile revenue management allowed cent while our Critical consignment us to benefit from a dynamic market. count grew by 35 per cent. Together We have also begun attracting talent with a rapid response to changing fuel from a range of sectors including We expect the market to be challenging prices, these factors culminated in banking, telecommunications and in 2019, continuing the recent trend of robust commercial performance across manufacturing. The combination of global airfreight capacity outpacing IAG Cargo’s hubs in London, Madrid fresh perspectives and skills, coupled market growth. Our strategy remains and Dublin. with existing airfreight expertise, builds unchanged, we will continue to focus on a strong team to embrace the customer service and to invest in Investment and innovation opportunities ahead. products, technology and operations to Throughout 2018 we progressed plans become the carrier of choice for Products and partnerships to adopt technology and digital customers worldwide. solutions, further unlocking the potential In 2018 IAG Cargo's global network of the business. increased capacity on key routes to Latin America and added new routes

28 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 DIGITAL

Committed to innovation Strategic Report Corporate Governance

Digital portfolio • Baggage. We have been working to Digital, both ventures now have During 2018, we continued to expand deliver automated robotics, removing established teams and are well digital innovations across our operating the need to manually handle bags positioned for fast growth. companies with enhanced focus from the conveyor belt into the IAG Digital is evaluating several new on five key areas: Shop Order Settle, aircraft bin; reducing personal injury opportunities in Maintenance Repair automation, data, marketplaces rates and increasing productivity. Overhaul, In‑Flight Commercial and and digital mindset. In addition, we • Autonomous Vehicle. During 2018 the Blockchain (amongst others) that are extended our commitment to innovation first airside autonomous vehicle trial under proof of concept with further took place and we have developed to protect our business and increase development expected during 2019. Financial Statements shareholder value by holding our third the first Autonomous Baggage Dolly and largest Hangar 51 accelerator prototype. Through 2019, we will be Digital Mindset programme to date. running three further driverless vehicle trials across the airport which Our Digital Mindset transformation Shop Order Settle will help us better understand the ensures that the Group is attracting and capabilities and define potential working with the best digital talent Shop Order Settle (Shop Order Pay) business opportunities. globally (both internally and externally) aims to drive the creation of a new • Above the wing. We are also working to tackle top business challenges. The retail platform for the Group to enable on customer identity. During 2018, we Group’s Hangar 51 accelerator rapid commercial changes delivering have implemented biometric identity programme is now in continuous cycle

revenue and customer satisfaction solutions for all Los Angeles and and our team has evaluated and Additional Information benefits as well as reducing cost. Orlando flights and at two gates in screened over 1,200 innovation partners Throughout 2018, our proofs of concept New York. Additionally, we have and new technologies from over 40 have established that a platform agreed with the US Government countries. The cross‑group initiative unconstrained by legacy standards and how, using these systems, we can sees our internal business and technology can be a reality. We have reduce the number of incorrectly technological experts rapidly pilot new demonstrated how to apply a modern documented passengers products and services to support our commerce platform within an airline and therefore lower the level employees and customers together with while connecting to one of our legacy of immigration fines. the top start‑ups and scale ups in just Passenger Service Systems. ten weeks. The range of technologies Data With the support and drive of Iberia showcased this year includes next Express, we worked with a start‑up to generation VR headsets to pilot new Data and our ability to leverage that launch a chatbot integrated into a immersive entertainment for the data is key for IAG. Data allows us to leading social media platform. The customer, bone‑conduction drive innovation, process change, technology enables the sale of Iberia communication gear to improve customer centricity and benchmarking. Express flights with the transactions communication and collaboration in held on a private blockchain, providing We aim to make the process of high noise work environments, machine a further alternative to the traditional collecting, connecting and using our vision analytics to automate and map Passenger Service System. Work has data to drive business value as effective, turnaround efficiency and data also started trialling machine learning efficient, easy, safe and secure as visualisation tools to optimise real techniques for pricing. possible. In 2019, we will accelerate the time telematics data and reduce development of the Nexus group data cargo delays. Automation platform to enable the deployment of group data services, artificial intelligence The Automation agenda aims to and other advanced analytics. Investments improve operational safety, enhance IAG has extended its Progress has been made this year regularity and drive efficiency. Our focus commitment to innovative growth through our collaboration with the has been on four areas: through enhanced investment Turing Institute on Passenger Revenue activity via Hangar 51 Ventures. • Ramp. Our aircraft pushback device Management Demand Forecasting. In The Group now has an active (Mototok) automated ramp safety addition, IAG Cargo has been using multi‑million pound venture fund check enabling an arriving aircraft to machine learning to optimise pricing evaluating strategic deals across turn on to stand as soon as it arrives. and initial trials are being held with the travel ecosystem. With Heathrow Airport, we are cargo agents. working on the automation of We are delighted to announce new Passenger Air Bridges. This Marketplaces investments in Blockchain and capability, in combination with the Fintech designed to enhance IAG’s automated safety check, will drive IAG continues to expand LEVEL and services in loyalty and travel and improvements in arrival punctuality Zenda from new business model we expect more exciting and customer satisfaction. projects to scaled up operations within opportunities to come! the Group. Following support from IAG

www.iairgroup.com 29 Delivering value by embedding the risk management culture

The Board of Directors has overall The management committee of each Guidance is provided below on the key responsibility for ensuring that IAG has operating company escalates risks that risks that may threaten the Group’s an appropriate risk management have Group impact or require Group business model, future performance, framework, including the determination consideration in line with the Group solvency and liquidity. of the nature and extent of risk it is ERM framework. Where there are particular willing to take to achieve its strategic At the Group level, key risks from the circumstances that mean that the risk objectives. It has oversight of the operating companies, together with is more likely to materialise, those Group’s operations to ensure that Group-wide risks, are maintained in a circumstances are described below. internal controls are in place and Group risk map. The IAG Management The list is not intended to be exhaustive. operate effectively. Management is Committee reviews risk during the year responsible for the execution of the including the Group risk map semi- Strategic risks agreed plans. IAG has an Enterprise Risk annually in advance of reviews by the Open competition and markets are in Management (ERM) policy which has Audit and Compliance Committee in the long-term best interests of the been approved by the Board. accordance with the 2016 UK airline industry and consumers. IAG This policy sets the framework for a Corporate Governance Code and has a high appetite for continued comprehensive risk management the Spanish Good Governance Code deregulation and consolidation. The process and methodology, ensuring a for Listed Companies. Group seeks to mitigate the risk from robust assessment of the risks facing The IAG Board of Directors discusses government intervention or changes to the Group, including emerging risks. risk at a number of meetings in addition the regulation of monopoly suppliers. This process is led by the Management to the risk map review, including a In general the Group’s strategic risk Committee and its best practices are review of the assessment of Group was stable during the year with shared across the Group. performance against its risk appetite. continued competitor capacity growth Risk owners are responsible for IAG has a risk appetite framework which being monitored and assessed within identifying and managing risks in their includes statements informing the the Group. The Group continues to area of responsibility within the key business, either qualitatively or support deregulation, manage the underlying business processes. All risks quantitatively, on the Board’s appetite supplier base and explore opportunities are assessed for likelihood and impact for certain risks. Each risk appetite for consolidation. against the Group Business Plan and statement formalises how performance Business and operational risks strategy. Key controls and mitigations is monitored either on a Group-wide are documented including appropriate The safety and security of customers basis or within major projects. These and employees is a fundamental value. response plans. Every risk has clear statements were reviewed for relevance Management Committee oversight. The Group balances the resources and appropriateness of tolerances at the devoted to building resilience into Risk management professionals ensure year end and it was confirmed to the operations and the impact of disruption that the framework is embedded across Board that the Group continued to on customers. the Group. They maintain risk maps for operate within each of the risk each operating company and at the appetite statements. The Group airlines were impacted by the significant level of Air Traffic Control Group level, and ensure consistency The highly regulated and commercially over the risk management process. strikes in Europe, requiring additional competitive environment, together with resilience to be built into the networks. Risk maps are reviewed by each the businesses’ operational complexity, operating company’s management exposes the Group to a number of risks. The theft of data from British Airways committee, which consider the accuracy We remain focused on mitigating these customers in September 2018 as a result and completeness of the map, risks at all levels in the business although of a criminal attack on its website significant movements in risk and any many remain outside our control; for demonstrates the increased risk threat changes required to the response plans example, changes in political and around cyber. The Group continues to addressing those risks. Each operating economic environment, government lead the response to technical and company’s management committee regulation, events outside of our control organisational security defences and confirms to its operating company causing operational disruption, fuel price incident response plans for each board as to the identification, and foreign exchange volatility and the operating company. quantification and management of competitive landscape. risks within its operating company as Risks are grouped into four categories: a whole annually. strategic, business and operational, financial including tax, compliance and regulatory risks.

30 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Link to strategy Strategic Report

1 Strengthening a portfolio of world-class brands and operations

Growing global leadership Corporate Governance positions 2 Financial risks However, the Group is also careful IAG balances the relatively high to understand its hedging positions business and operational risks inherent compared to competitors to Enhancing in its business through adopting a ensure that it is not commercially IAG’s common low appetite for financial risk. This disadvantaged by being over-hedged integrated 3 platform conservative approach involves in a favourable market. maintaining adequate cash balances In 2018, events in the political and Key: Risk trend and substantial committed financing economic landscape continued to

facilities. There are clear hedging create uncertainty, increasing the Financial Statements policies for fuel price and currency volatility of the fuel price and risk exposure which explicitly consider foreign exchange. appetite for fluctuations in cash and profitability resulting from Compliance and regulatory Increase Stable Decrease market movements. The Group has no tolerance for breaches of legal and regulatory requirements. See pages 12-17 for our Strategy

Strategic Additional Information Risk Risk context Management and mitigation Airports, IAG is dependent on and may be affected London Heathrow has no spare runway capacity. In October infrastructure by infrastructure decisions or changes in 2016, the UK government confirmed a third runway expansion and critical policy by governments, regulators or proposal at Heathrow and IAG continues to promote an third parties other entities which impact operations efficient, cost effective, ready to use and fit for purpose third but are outside of the Group’s control. runway solution. 1 The Group’s airlines participate in the slot trading market, including at London airports. 3 IAG is dependent on the oil industry The Group enters into long-term contracts with fuel suppliers to making sufficient investment in the fuel ensure fuel supply at a reasonable cost. supply infrastructure to ensure that our Potential fuel shortages are addressed by contingency plans, flight operations can be delivered as including appropriate investment in securing fuel supply. scheduled. Capacity issues are regularly reviewed by the IAG Management Committee and form part of the annual Business Plan. IAG is dependent on the performance of Supplier performance risks are mitigated by active supplier suppliers such as airport operators, border management and contingency plans. control and caterers. IAG is dependent on the timely entry of The Group mitigates engine and fleet performance risks to new aircraft and the engine performance the extent possible by working closely with the engine and of aircraft to improve operational fleet manufacturers. efficiency and resilience. The Group has been impacted by ongoing issues with Rolls Royce Trent and Pratt and Witney engines in the year. IAG is dependent on resilience within The Group continues to lobby and raise awareness of the the operations of Air Traffic Control negative impacts of air traffic control strikes and ATC (ATC) services to ensure that our flight performance issues on the aviation sector and economies operations are delivered as scheduled. across Europe.

www.iairgroup.com 31 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED

Strategic Risk Risk context Management and mitigation Brand The Group’s brands have significant Each brand is supported by initiatives within the Group Business reputation commercial value. Erosion of the brands, Plan, where capital expenditure is reviewed and approved by the through either a single event or a series Board of Directors. 1 of events, may adversely impact the The Group has undertaken a significant review of the portfolio of Group’s leadership position with brands within IAG to understand customer preferences and customers and ultimately affect future better position its offerings. revenue and profitability. There are multiple product investments across the Group’s If the Group is unable to meet the brands to enhance on-board product, ancillaries, lounges and expectations of its customers and does customer experience. Success of these investments is measured, not engage effectively to maintain their including their impact on customer satisfaction through the Net emotional attachment, then the Group Promoter Score (NPS). may face brand erosion and loss of market share. The Group allocates substantial resources to safety, operational integrity and new aircraft to maintain its market position. Competition The markets in which the Group operates The IAG Management Committee devotes one weekly meeting are highly competitive. The Group faces per month to strategic issues. The Board of Directors discusses 1 direct competition on its routes, as well as strategy throughout the year and dedicates two days per year to from indirect flights, charter services and review the Group’s strategic plans. other modes of transport. Competitor The Group strategy team supports the Management Committee 2 capacity growth in excess of demand by identifying where resources can be devoted to exploit growth could materially impact margins. profitable opportunities. The airlines’ revenue management Some competitors have lower cost departments and systems optimise market share and yield structures or have other competitive through pricing and inventory management activity. advantages such as government support The Group is continually reviewing its product offerings and or benefits from insolvency protection. responds through initiatives to improve the customer experience. In 2018, IAG continued expansion of LEVEL, launching short haul operations from Vienna and long haul operations from Paris. The Group’s strong global market positioning, leadership in strategic markets, alliances, joint businesses, cost competitiveness and diverse customer base help mitigate competition risk. Consolidation Although the airline industry is competitive, The Group maintains rigorous cost control and targeted product and we believe that the customer would benefit investment to remain competitive. deregulation from further consolidation. Failing airlines The Group has the flexibility to react to market opportunities can be rescued by government support, arising from competitors. delaying the opportunity for more efficient airlines to capture market share and The Group continues to consider organic and inorganic expand. Mergers and acquisitions amongst growth options. 2 competitors have the potential to adversely The portfolio of brands provides flexibility in this regard as affect our market position and revenue. capacity can be deployed at short notice as needed. Joint business arrangements such as the The IAG Management Committee regularly reviews the agreements with American Airlines, JAL commercial performance of joint business agreements. and Qatar Airways include delivery risks such as realising planned synergies and agreeing the deployment of additional capacity within the joint business. Any failure of a joint business or a joint business partner could adversely impact our business. The Group has a number of franchise partners that feed traffic into our hubs or major outstations. Any failure of a franchise partner will reduce traffic feed. The Group is reliant on the other members The Group maintains a leading presence in oneworld to ensure of the oneworld alliance to help safeguard that the alliance attracts and retains the right members, which is the alliance proposition. key to ongoing development of the network. Digital Competitors and new entrants to the travel The Group’s focus on the customer experience, together with the disruption market may use technology to more Group’s exploitation of technology, reduces the impact digital effectively disrupt the Group’s business disruptors can have. model or technology disruptors may use 1 The Group continues to develop platforms such as the New tools to position themselves between our Distribution Capability, changing distribution arrangements and brands and our customers. moving from indirect to direct channels. 2 3 The Hangar 51 programme continues to create early engagement and leverages new opportunities with start-ups and technology disruptors.

32 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Strategic Report Risk Risk context Management and mitigation Government Some of the markets in which the The Group’s government affairs department monitors intervention Group operates remain regulated by government initiatives, represents the Group’s interest and governments, in some instances controlling forecasts likely changes to laws and regulations. capacity and/or restricting market entry. Changes in such restrictions may have a negative impact on margins. 2 3 Regulation of the airline industry covers The Group’s ability to comply with and influence changes to many of our activities including route flying regulations is key to maintaining operational and financial Corporate Governance rights, airport landing rights, departure performance. The Group continues to monitor and discuss the taxes, security and environmental controls. negative impacts of government policies such as the imposition Excessive taxes or increases in regulation of Air Passenger Duty (APD). may impact on the operational and financial performance of the Group. Business and operational Cyber attack The Group could face financial loss, The IAG Management Committee regularly reviews cyber risk and and data disruption or damage to brand supports Group-wide initiatives to enhance defences and security reputation arising from an attack on the response plans. Group’s systems by criminals, terrorists The Committee ensures that the Group is up to date with industry or foreign governments. standards and addresses identified weaknesses. Financial Statements If the Group does not adequately protect There is oversight of critical systems and suppliers to ensure that customer and employee data, it could 2 3 the Group understands the data it holds, that it is secure and breach regulation and face penalties and regulations are adhered to. loss of customer trust. A GDPR programme was implemented across the Group in 2018 as part of its ongoing privacy programmes. During 2018, the Network and Information Systems (NIS) Directive was implemented. British Airways, Iberia, Vueling and Aer Lingus are all within scope of the requirements, which are

being addressed as part of a broader programme of activity to Additional Information continuously improve cyber defences. In September, British Airways reported the theft of data from its customers as a result of a criminal attack on its website. The fast moving nature of this risk means that the Group will always retain a level of vulnerability. Event causing An event causing significant network Management has business continuity plans to mitigate this risk to significant disruption may result in lost revenue and the extent feasible. network additional costs if customers or employees The significant level of ATC strikes in Europe impacted the Group disruption are unable to travel. airlines operational performance. Response plans to manage and Example scenarios include persistent air reduce impact on the Group’s customers and operations have 1 traffic control industrial action; war; civil been put in place. unrest or terrorism; closure of airports or airspace; major failure of the public 3 transport system; the complete or partial loss of the use of terminals; adverse weather conditions or pandemic. IT systems IAG is dependent on IT systems for System controls, disaster recovery and business continuity and IT most key business processes. The failure arrangements exist to mitigate the risk of a critical system failure. infrastructure of a critical system may cause significant The Group continues to work with world class partners and is disruption to the operation and increasing resilience by implementing agreed plans which lost revenue. 1 include investing in new technology, updates and a robust Increasingly the integration within IAG’s operating platform. supply chain means that the Group is also 3 dependent on the performance of suppliers’ IT infrastructure, e.g. airport baggage operators. Landing fees Airport charges represent a significant The Group engages in regulatory reviews of supplier pricing, such and security operating cost to the airlines and have as the UK Civil Aviation Authority’s periodic review of charges at charges an impact on operations. Whilst certain London Heathrow and London Gatwick airports. airport and security charges are itemised to The Group is active both at an EU policy level and in passengers, others are not. consultations with airports covered by the EU Airport Charges Directive. 2 3 In some cases, regulation provides some assurance that such costs will not increase in an uncontrolled manner.

www.iairgroup.com 33 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED

Business and operational Risk Risk context Management and mitigation People and The Group has a large unionised Collective bargaining takes place on a regular basis with the operating employee workforce represented by a number companies' human resources departments with a significant level of relations of different trade unions. negotiation across the Group’s operating companies. Any breakdowns in the bargaining Management focuses on leveraging employee expertise and ensuring 1 process with the unionised the development of talent. Succession planning is in place across all workforces may result in subsequent operating companies and we aim to move our best people across strike action which may disrupt our businesses. 3 operations and adversely affect business performance. Political and IAG remains sensitive to political The IAG Board of Directors and the Management Committee review economic and economic conditions in the the financial outlook and business performance of the Group through conditions markets globally. Deterioration in the financial planning process and regular reforecasts. These reviews either a domestic market or the are used to drive the Group’s financial performance through the 1 global economy may have a management of capacity and the deployment of that capacity material impact on the Group’s in geographic markets, together with cost control, including financial position, while foreign management of capital expenditure and the reduction of 2 exchange and interest rate operational and financial leverage. movements create volatility. External economic outlook, fuel prices and exchange rates are carefully considered when developing strategy and plans and are regularly reviewed by the Board of Directors and IAG Management Committee as part of the monitoring of financial and business performance. Wider macro economic trends are being monitored such as tensions between the US and China, currency devaluation in Argentina and the changing political landscape. Following the UK referendum decision in 2016, the UK is expected to leave the EU on March 29, 2019. The Group has continued to engage extensively with the relevant authorities to ensure IAG’s views on post-Brexit aviation arrangements are understood and taken into account. This has included frequent dialogue with the UK, Spanish and Irish governments, as well as the European Commission and Members of the European Parliament. The completion of a Withdrawal Agreement between the negotiators confirmed that there would be no change to aviation arrangements until the end of the transition period on December 31, 2020 and that the future relationship between the parties would include a comprehensive air transport agreement. As the Withdrawal Agreement is subject to ratification by the UK and EU parliaments, both the European Commission and the UK Government published separate plans to allow air services to continue in the event that the Withdrawal Agreement (or an amended version of it) cannot be ratified. These include mechanisms to permit flights between the UK and the EU and recognition of each other’s safety certification, approvals and security regimes. As part of this, the EU is in the process of adopting a Regulation on basic connectivity between the EU and UK that may result in some restrictions on code share flexibility. In addition, in November the UK signed new air services agreements with the USA and Canada to replace existing EU-wide agreements once the UK leaves the EU, securing market access and regulatory arrangements for the future. IAG has had detailed and constructive engagement with its national regulators and governments about ownership and control. These discussions will continue, including with the European Commission, and IAG remains confident that its operating companies will comply with the relevant ownership and control rules post Brexit. IAG is a Spanish company, its airlines have long-established Air Operator Certificates (AOCs) and substantive businesses in Ireland, France, Spain and the UK and IAG has had other structures and protections in its by-laws since it was set up in 2011. IAG’s assessment remains that, even in the event of no-deal, Brexit will have no significant long-term impact on its business.

34 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Business and operational Strategic Report Risk Risk context Management and mitigation Safety/security The safety and security of our customers The corresponding safety committees of each of the airlines incident and employees are fundamental values for of the Group satisfy themselves that it has the appropriate the Group. A failure to prevent or respond resources and procedures which include compliance with effectively to a major safety or security Air Operator Certificate requirements. Incident centres incident may adversely impact the respond in a structured way in the event of a safety or Group’s brands, operations and security incident. 2 financial performance. Corporate Governance Financial Debt funding The Group has substantial debt that will The IAG Management Committee regularly reviews the need to be repaid or refinanced. The Group’s financial position and financing strategy. Group’s ability to finance ongoing The Group continues to have good access to a range of operations, committed aircraft orders and financing solutions. The Group’s high cash balances and future fleet growth plans is vulnerable to committed financing facilities mitigate the risk of short-term 2 3 various factors including financial market interruptions to the aircraft financing market. conditions and financial institutions’ appetite for secured aircraft financing. Financial risk Volatility in the price of oil and petroleum Fuel price risk is partially hedged through the purchase of oil

products can have a material impact on derivatives in forward markets. The objective of the hedging Financial Statements our operating results. programme is to increase the predictability of cash flows and profitability. The IAG Management Committee regularly reviews its fuel and currency positions. 2 3 The approach to fuel risk management is set out in note 25 to the Group financial statements. The Group is exposed to currency risk on The Group seeks to reduce foreign exchange exposures revenue, purchases and borrowings in arising from transactions in various currencies through a foreign currencies. policy of matching and actively managing the surplus or shortfall through treasury hedging operations.

The approach to financial risk management is set out in note Additional Information 25 to the Group financial statements. The Group is exposed to currency When there are delays in the repatriation of cash coupled with devaluation of cash held in currencies the risk of devaluation, risk is mitigated by the review of other than the airlines’ local currencies of commercial policy for the route. euro and sterling. Interest rate risk arises on floating rate The impact of rising interest rates is mitigated through debt and floating rate leases. structuring selected new debt and lease deals at fixed rates throughout their term. The approach to interest rate risk management and proportions of fixed and floating debt is set out in note 25 to the Group financial statements. The Group is exposed to non- The approach to financial risk management, interest rate risk performance of financial contracts by management, proportions of fixed and floating debt counterparties for activities such as management and financial counterparty credit risk money market deposits, fuel and currency management and the Group’s exposure by geography is set hedging. Failure of financial counterparties out in note 25 to the Group financial statements. may result in financial losses. Tax The Group is exposed to systemic tax The Group adheres to the Tax Policy approved by the IAG risks arising from either changes to tax Board and is committed to complying with all tax laws, to legislation or a challenge by tax acting with integrity in all tax matters and to working openly authorities on interpretation of tax with tax authorities. Tax risk is managed by the operating legislation. There is a reputational risk that companies with oversight from the IAG Tax Department. Tax 2 3 the Group’s tax affairs are questioned by risk is overseen by the Board through the Audit and the media or other representative bodies. Compliance Committee.

www.iairgroup.com 35 RISK MANAGEMENT AND PRINCIPAL RISK FACTORS CONTINUED

Compliance and regulatory Risk Risk context Management and mitigation Group governance The governance structure the Group put The governance structure is being extended to other structure in place at the time of the merger had a Group airlines, including Aer Lingus (see page 34 for number of complex features, including further details). nationality structures to protect British IAG will continue to engage with the relevant regulatory Airways’ and Iberia’s route and bodies as appropriate regarding the Group structure. operating licences. 3 IAG could face a challenge to its ownership and control structure. Non-compliance The Group is exposed to the risk of The Group has clear frameworks in place including with key regulation individual employees’ or groups of comprehensive Group-wide policies designed to including employees’ unethical behaviour resulting ensure compliance. competition, in reputational damage, fines or losses to There are mandatory training programmes in place to educate bribery and the Group. employees in these matters. corruption law Compliance professionals specialising in competition law and anti-bribery legislation support and advise our businesses.

2 3

Viability statement and assessed the likely effectiveness operational disruption. These scenarios The directors have assessed the viability of the mitigations that management considered the principal risks which of the Group over the five years to reasonably believes would be available could have the greatest potential December 2023. and effective over this period. Each impact on viability in that period. scenario considered the impact on Based on this assessment, the The directors have determined that a liquidity, solvency and the ability to five-year period is an appropriate directors have a reasonable expectation raise financing over the period to that the Group will be able to continue timeframe for assessment as it is in line December 2023. with the Group Business Plan strategic in operation and meet its liabilities as planning period. The scenarios modelled considered the they fall due over the period to potential impact of a global economic December 2023. The directors have evaluated the downturn, fuel price shock and the impact of severe but plausible downside impact of risks that would result in scenarios on the Group Business Plan

36 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 FINANCIAL OVERVIEW

Delivering sustainable returns Strategic Report Corporate Governance

“The Group’s financial performance reflects our ability to deliver sustainable returns in a challenging

environment” Financial Statements

Enrique Dupuy de Lôme Chávarri Chief Financial Officer Additional Information

The financial performance of IAG The Group’s cost plans are embedded in In the last quarter of the year, S&P and through 2018 has been a strong one our organisations with the aim of driving Moody’s assigned IAG with a long term in an economic environment that permanent efficiency improvements in credit rating of investment grade with was challenging but reflecting areas such as: supplier chain, labour an outlook of stable. This reflects the interesting growth opportunities in productivity and ownership costs, Group’s financial strength and our strategic markets. while at the same time, 2018 has been profitability, competitive market a year of great focus on enhancing our positioning and resilience, our Our fuel cost increased although in a customers’ experiences through Adjusted Net Debt to EBITDAR smoother way than market prices due improving lounges, catering, ratio remained strong at 1.6 times. to our hedging positions, and demand connectivity and longhaul seats. We continued improving through the year Following these financial achievements, continue to focus on medium term showing a rare synchronised economic the Board proposed a final dividend of initiatives, such as IT solutions, new trend of the worldwide major 16.5 euro cents on February 27th, 2019 generation Infrastructure and Data economies. This underlying trend and announced its intention to propose management projects. has been coexisting with mounting a special dividend of approximately uncertainties on end of cycle and As many other airlines in Europe €700 million in 2019, both subject to geopolitical concerns. we have been suffering increased shareholder approval at our AGM in disruptions associated with Air Traffic June. Taken together with the interim We have achieved an operating profit of Control’s lack of adequate resources dividend paid in December 2018 this will €3,230 million before exceptional items, and strikes. This has had an represent dividends of €1,315 million a year on year improvement of €280 unfavourable impact on our cost to our shareholders. million and, met or exceeded our key base and also a negative impact on financial targets with an adjusted margin Enrique Dupuy de Lôme Chávarri passenger experience and Net of 14.4 per cent, return on Invested Chief Financial Officer Promoter Score in some of our airlines. Capital of 16.6 per cent and adjusted earnings per share growth of 15.1 per 2018 was a significant year in terms cent. Our Net Earnings before of CAPEX for the Group and this very exceptional items reached a record much related to the timetable of new figure of €2,481 million. This robust set generation aircraft deliveries, both for of achievements has been based on the renewal and growth, resulting in a Net positive performance of our basic CAPEX figure of €2,228 million. revenue and cost key metrics. We have Correspondingly, our Equity Free Cash improved both our unit revenues and Flow for the year has been reduced to our non-fuel unit costs at constant €1,801 million which is at the low end currency, more than offsetting the fuel of our medium-term range but is cost increase while growing 6.1 per cent consistent with our plans for the year. in ASK terms.

www.iairgroup.com 37 FINANCIAL REVIEW

IATA market growths IAG capacity The air traffic industry had another strong year. Economic In 2018, IAG increased capacity by 6.1 per cent, including growth is keeping traffic ahead of the industry’s 6.1 per cent LEVEL, for the full year. Capacity was increased in all airlines capacity increase with a slight net gain of 0.3 pts in passenger and throughout each region except for Asia Pacific. load factor. The increase partially reflects new longhaul routes at British In 2018, airline capacity growth in Europe was one of the Airways, Iberia and Aer Lingus and the full year impact of highest regions. The growth was 5.8 per cent as it recovered routes launched in 2017. In shorthaul, new routes were from the impacts of terrorist attacks in 2016. The environment launched by LEVEL in Vienna, and frequencies in Domestic was competitive and passenger load factors increased both of and European routes were added by Iberia and Vueling. which impacted yields. Europe recorded the highest IAG passenger load factor reached its highest level since the passenger load factor for the year. creation of IAG at 83.3 points, 0.7 points higher than the North America’s airline capacity growth was 4.7 per cent previous year and 1.4 points higher than the IATA average. during the year and the region retained a position of strong financial performance. IAG Network by region (measured in ASKs) Domestic Latin America’s airline capacity growth was higher than the Europe total market average at 6.6 per cent and ahead of last year’s 8.3% 6.9% North America growth of 5.5 per cent. The market environment began to 12.1% 26.1% turnaround in 2017 and showed some improvement in 2018, Latin America and Caribbean however it remained harsh. Passenger load factor in this 6.1% Africa, Middle East and South Asia region decreased and overall profitability decreased. 16.5% Asia Pacific Africa was the weakest region for the airline industry with 30.1% growth of only 1.0 per cent. Despite the low capacity increase, load factors improvement was relatively low and passenger load factor was the lowest of all the regions. The Middle East’s airline industry growth was moderate and lower than the market average. Passenger load factor performance deteriorated from a relatively low base with demand impacted by the political environment. Market segments Airline capacity growth in the Asia Pacific region was high at IAG capacity ASKs higher/ Passenger Higher/ 7.9 per cent with diverse performance across the region. Year to December 31,2018 (lower) load factor (lower) IATA market growths Domestic 9.1% 85.0 1.8 pts Capacity Passenger Higher/ Europe 6.2% 83.2 1.2 pts Year to December 31, 2018 ASKs load factor (lower) North America 8.0% 82.3 0.0 pts Europe 5.8% 84.5 0.6 pts Latin America and North America 4.7% 83.8 0.2 pts Latin America 6.6% 81.6 (0.3)pts Caribbean 8.7% 84.7 0.7 pts Africa 1.0% 71.4 1.0 pts Africa, Middle East Middle East 4.9% 74.8 (0.6)pts and South Asia 0.8% 82.4 1.6 pts Asia Pacific 7.9% 81.5 0.5 pts Asia Pacific 0.0% 84.7 0.1 pts Total market 6.1% 81.9 0.3 pts Total network 6.1% 83.3 0.7 pts

Source: IATA Air Passenger Market Analysis

38 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Eurozone North America Eurozone inflation reached 2.0 per cent, quantitative In 2018, US GDP grew 2.9 per cent which was ahead of last easing programmes substantially came to an end, and year and forecast. Growth accelerated over the year unemployment reduced throughout the year. However benefiting from tax rate reductions and lower unemployment consumer confidence ended the year lower than it began, supporting consumption. The airline industry’s passenger impacted by protests in France, reduction in the industrial capacity grew 4.7 per cent while IAG grew 8.0 per cent production growth rate in Germany and deterioration in the serving a new market segment (low cost longhaul), adding Italian economy. While the Eurozone GDP grew 2.0 per cent, new destinations from Ireland, Spain and the UK and the airline industry’s passenger capacity rate was 5.8 per cent. increasing frequencies. Financial Statements IAG’s European market, taken together with Domestic, is IAG’s North American market represents a significant part home to our airline hubs and represents our largest market. of the Group’s capacity with over 30 per cent of total ASKs. We grew slightly ahead of the airline industry average Capacity was increased in British Airways, Iberia, and Aer increasing the breadth and depth of our schedules, serving Lingus. British Airways started operating two new routes, more cities and adding frequencies. Nashville from London Heathrow and Toronto from Gatwick, as well as growth in several routes including New Orleans, Las In IAG’s Domestic markets capacity was higher by 9.1 per cent Vegas, Boston and Los Angeles. Iberia’s capacity increase with increases at Vueling and Iberia. As part of its NEXT came mainly from its new route to San Francisco and the full strategy, Vueling increased frequencies on existing routes and year impact of routes extended from seasonal services, as launched three new routes. Capacity in Iberia’s domestic well as routes launched throughout 2017. Aer Lingus’ North market was increased with growth in the Balearics and American capacity was increased with the launch of new Additional Information Canaries. Passenger load factor performance was strong, routes to Philadelphia and Seattle and the full year impact of almost two points higher versus last year. routes launched in 2017. LEVEL’s growth reflects the full year In the Domestic market, the Group’s passenger unit revenues impact of its longhaul routes from Paris. Seat factor for the were up across all airlines. The Group’s domestic performance region was maintained at 82.3 per cent. Despite the capacity improved throughout the year and benefited from the increase, passenger numbers grew in line with capacity. Spanish government subsidy to residents in the Balearic North America passenger unit revenues at ccy were broadly and Canaries Islands . flat versus last year. Aer Lingus passenger unit revenues The Group’s European capacity increased year on year. decreased slightly on a capacity increase of 17.2 per cent, LEVEL Vienna started shorthaul services in July 2018 with 14 while LEVEL expansion had a dilutive impact on the Group’s new destinations from the Austrian capital, including London, passenger unit revenues due to its lower fares. British Airways Barcelona and Paris. Iberia’s capacity increased through and Iberia’s performances improved versus last year from higher frequencies in several routes, including Madrid to Milan, higher yields at British Airways and increases in passenger Berlin, Paris and Prague. Increases in Vueling came mainly load factor at Iberia. from additional frequencies on routes from France and Italy to Spain. Load factor was also up 1.2 points. GDP growth In 2018, the Group’s European markets continued to perform strongly with increases at British Airways, Vueling and Aer 3.4% 2.9% Lingus. Iberia’s passenger unit revenues decreased in Europe 2.7% 2.3% 2.3% following a year of quarter on quarter improvements and on 2.1% a modest capacity increase.

GDP growth

Actual IMF 2018 Actual

4.7% 2017 forecast 2018

4.1% January

3.4% 2018 3.1% 2.7% 2.4% 2.4% 2.2%

2.0% US GDP 1.7% 1.5% 1.4% Canada GDP

Actual IMF 2018 Actual 2017 forecast 2018 January 2018

UK Spain Ireland Eurozone

www.iairgroup.com 39 FINANCIAL REVIEW CONTINUED

Latin America and Caribbean Africa, Middle East and South Asia (AMESA) Latin America GDP grew in line with last year but significantly AMESA capacity increased slightly in 2018 from British below forecasts. Argentina re-entered recession while Airways’ new routes to Durban and Seychelles, and additional Venezuela’s recession deepened and Brazil’s growth rate was capacity to Johannesburg and Marrakech. Iberia increased lower than expectations. The airline industry’s passenger capacity in Marrakech, partially offset by the cancellation of capacity grew 6.6 per cent while IAG grew 8.7 per cent services to Equatorial Guinea. Passenger load factor was however from a lower market share position. As with North strong and was 0.5 points higher than the industry average. America, IAG’s growth included serving the low cost longhaul The Group is growing at a slower pace than the airline market, new destinations and additional frequencies. industry average in these areas reflecting in part the challenging political environment and economic conditions. IAG’s capacity in Latin America and Caribbean was increased with LEVEL’s new routes to Guadalupe and Martinique and Africa, Middle East and South Asia passenger unit revenue the full year impact of routes launched in June 2017 from performance fluctuated across the routes. Improvements Barcelona. Iberia continued to increase frequencies to Mexico benefited in part from relatively flat capacity versus last year. City during the year, continuing its growth from 2017 and British Airways passenger unit revenue was up at ccy adding frequencies to Santiago de Chile, Guatemala and El and Iberia’s African routes such as Dakar and Morocco Salvador. British Airways increased capacity to Santiago de performed well. Chile, Sao Paulo and Rio de Janeiro. Passenger load factor in Asia Pacific this region improved and was again significantly higher than In Asia Pacific, the Group’s capacity was flat versus 2017. the industry average. Iberia’s increased services were offset by decreases in British Latin America and Caribbean passenger unit revenues at ccy Airways’ capacity. Passenger load factor remained broadly increased around 1.5 per cent, with significant improvements flat and continued to be among the highest in the IAG in the first half of the year offset by reductions in the latter network. The Group is also growing at a slower pace in the half. Performance in South America was volatile with Asia Pacific region reflecting in part the challenging economies such as Argentina and Brazil impacted by the competitive and regulatory environment. political uncertainty driving deterioration through the year. Asia Pacific was broadly flat versus last year on flat Peru, Ecuador and Colombia performed well. The Caribbean capacity with mixed performance across the routes. While and Mexican routes also saw fluctuations but generally demand has been relatively stable industry capacity has performed well. risen significantly. GDP growth 5.7% 5.6% 5.5% 3.6% 3.3% 3.1% 2.7% 2.4% 2.2% 1.9% 1.3% 1.2%

Actual IMF 2018 Actual 2017 forecast 2018 January 2018

Latin America Middle East, North Africa, Afghanistan and Pakistan Subsaharan Africa Asia

40 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Revenue Other revenue Higher/(lower) Other revenue rose 15.1 per cent, 18.3 per cent at constant Year over Per ASK at currency from increases in: € million 2018 year at ccy ccy • Iberia’s third party maintenance (MRO) billings and Passenger revenue 21,549 8.6% 2.4% handling activity, Cargo revenue 1,173 7.2% • BA Holidays bookings, Other revenue 1,684 18.3% • Avios revenues from higher points issuance and product redemptions, and

Total revenue 24,406 9.2% Financial Statements • Rental revenues, primarily at John F Kennedy airport Passenger revenue Total revenue for the Group rose 6.7 per cent with increases On a reported basis, passenger revenue for the Group rose in passenger, cargo and other revenue. At ccy, total revenue 6.2 per cent versus the prior year, with 2.4 points of adverse was up 9.2 per cent, higher than the Group’s ASK growth. currency, while capacity was increased 6.1 per cent. At constant currency (‘ccy’), passenger unit revenue (passenger Expenditure before exceptional items revenue per ASK) increased 2.4 per cent from higher yields Employee costs (passenger revenue/revenue passenger kilometre) up 1.5 per Employee costs increased 1.5 per cent before exceptional cent and a 0.7 point rise in passenger load factor. At the items for the year. At constant currency, employee unit costs airline level, passenger unit revenue at ccy increased versus improved 3.3 per cent with pay increases primarily linked to last year at each of the Group’s airlines. On a quarterly RPI, offset by efficiency and restructuring initiatives across Additional Information basis, the Group’s passenger unit revenue at ccy was also the Group. positive in every quarter although at a slower pace as the British Airways closed its New Airways Pension Scheme year progressed. (NAPS) to future accrual and British Airways Retirement Plan The Group carried almost 113 million passengers an increase (BARP) to future contributions from March 31, 2018. The of 7.7 per cent from 2017, with passenger load factor schemes have been replaced by a flexible defined improvement of 0.7 points for the Group and at four of the contribution scheme, the British Airways Pension Plan (BAPP). five airlines. Since April 2017, Net Promoter Score is being The changes resulted in a reduction in the NAPS IAS 19 measured consistently for British Airways, Iberia, Vueling and defined benefit liability of €872 million, transitional Aer Lingus. The Group’s Net Promoter Score for 2018 was 16.3 arrangement cash costs of €192 million (recognised as an per cent a decrease of 0.5 points versus the reported figure exceptional) and a reduction in current service cost. last year (April to December). Product upgrades and service Overall the average number of employees rose by 2.1 per cent enhancements were well received by customers; however, for the Group bringing our average workforce to 64,734 and these improvements were more than offset by the challenging productivity increased 3.9 per cent with improvements at Air Traffic Control environment. The ATC disruption impacted British Airways, Iberia, Vueling and Aer Lingus. Vueling resulting in both Vueling and the Group missing its 2018 NPS target of 20. Iberia’s 2018 score was broadly flat Employee costs versus its target, while British Airways and Aer Lingus Higher/(lower) exceeded their 2018 targets. Year over Per ASK at € million 2018 year at ccy ccy Cargo revenue Employee costs 4,812 2.6% (3.3)% The market in 2018 saw a strong start, but growth then slowed markedly as the year progressed. Cargo revenue for Productivity the period increased by 3.6 per cent, excluding currency Higher/(lower) 7.2 per cent. Volume measured in tonne kilometres (CTK) Year over decreased by 0.9 per cent on a capacity increase of 3.8 per 2018 year cent. Yield improved by 8.1 per cent at constant currency. Productivity 5,018 3.9% Strategic focus continued to be on premium products, Average manpower equivalent 64,734 2.1% investing for growth and continuing to modernise the business. This included the investment in a new Constant See note 7 in our Financial statements for more information on our Climate Centre in Madrid, a new Critical Service Centre in employee costs and numbers. London with a specialised customer service team and an improving customer experience on IAGCargo.com.

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Fuel, oil and emissions costs Supplier costs Fuel, oil and emissions costs rose by 14.6 per cent in 2018 Handling, catering and other operating costs primarily from higher average fuel prices net of hedging, 0.8% Landing fees and en-route charges partially offset by a weaker USD and from management 11.7% Engineering and other aircraft costs efficiencies. Average fuel price rose from approximately $520 10.3% 32.3% per metric tonne in 2017 by 32 per cent to approximately Property, IT and other costs $685 in 2018. The Group gained fuel efficiencies from new Selling costs 20.5% aircraft and from improved operational procedures Currency dierences implemented across the airlines. At ccy and on a unit basis, 24.4% fuel costs were 12.5 per cent higher. Fuel, oil and emissions costs Higher/(lower) By supplier cost category: Year over Per ASK at Handling, catering and other operating costs rose 8.0 per € million 2018 year at ccy ccy cent, excluding currency up 10.1 per cent. The year on year Fuel, oil costs and comparison is impacted by a €65 million charge in the base emissions charges 5,283 19.3% 12.5% related to operational disruption at British Airways in 2017. Otherwise the Group’s Handling, catering and other operating See note 25 in our Financial statements for more information on our costs rose 12.8 per cent at ccy. Half of this increase can be hedging policy. attributed to volume, from a 7.7 per cent rise in passengers Supplier costs carried and from additional activity at BA Holidays. The Group continued its focus on improving the customer proposition by Total supplier costs for the year increased 5.0 per cent with investing in lounges, catering and service delivery. Inflation 1.5 points of positive currency impacts. At ccy and on a unit increases in supplier contracts were partially offset by savings basis, supplier costs rose 0.4 per cent. In 2018, the Group’s while disruption costs rose significantly. Air traffic non-ASK related businesses, such as MRO, BA Holidays and control strikes and regulations impacted our operational Avios grew. This increased our supplier costs, in particular performance increasing disruption costs throughout 2018, in Handling, catering and other operating costs and Engineering particular Vueling’s. and other aircraft costs with a corresponding increase in Other revenue. Landing fees and en-route charges were higher by 1.5 per cent, excluding currency up 3.0 per cent. Costs rose primarily Supplier costs from higher activity, with flying hours up 5.1 per cent and Higher/(lower) sectors flown up 5.2 per cent. Price increases were broadly Year over Per ASK at net neutral in 2018. € million 2018 year at ccy ccy Supplier costs: 0.4% Engineering and other aircraft costs increased 3.1 per cent, Handling, catering excluding currency up 7.1 per cent. Increases were driven by and other operating additional third party maintenance activity at Iberia (c.4.8 points) and from higher flying hours. These increases have costs 2,888 10.1% been partially offset by contractual remedies recognised for Landing fees and an issue with the Rolls-Royce Trent 1000 engines. British en-route charges 2,184 3.0% Airways received compensation for additional costs incurred Engineering and due to the reduction in flying hours. other aircraft costs 1,828 7.1% Property, IT and other costs were up 0.3 per cent, excluding Property, IT and other currency up 1.9 per cent. The increase reflects higher IT and costs 918 1.9% professional costs and inflation on rent and rates. Selling costs 1,046 8.2% Selling costs increased 6.5 per cent, excluding currency up 8.2 Currency differences 73 0.0% per cent. Selling costs rose from higher volumes, point of sale mix and changes in the Group’s distribution model. The Group British Airways’ supplier unit costs at ccy were up slightly. launched a new distribution model in November 2017 Investments in customer, incremental BA Holiday costs, increasing our selling costs with a corresponding rise in fares higher selling costs related to the new distribution model and and more direct access to our customers. inflation were mainly offset by lower engineering costs. Iberia supplier unit costs decreased with efficient growth and management initiatives offsetting increases in maintenance costs related to its third-party MRO business and investments in customer. Vueling supplier unit costs were adversely impacted by significant ATC disruption costs. Aer Lingus had a favourable supplier unit cost performance from cost saving initiatives and efficient growth.

42 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Ownership costs 2018 The Group’s ownership costs were up 3.5 per cent, excluding Total currency up 5.7 per cent. The increase reflects higher Translation Transaction exchange depreciation charges for the Boeing 747 fleet from lower € million impact impact impact expected residual values and from new owned aircraft (4 Total exchange impact Boeing 787s, 2 Airbus A350s, 3 Airbus A330s, 11 Airbus A320 on revenue (183) (389) (572) family). The Group has retired its fully depreciated Boeing Total exchange impact 767s. Operating lease costs rose mainly due to incremental on operating

wet lease costs incurred to operate the Monarch slots at expenditures 163 280 443 Financial Statements London Gatwick airport and additional leased aircraft Total exchange impact primarily Airbus A320s, A321s and A330s, including the on operating profit (20) (109) (129) aircraft for LEVEL. Ownership costs Operating profit before exceptional items Higher/(lower) In summary, the Group’s operating profit before exceptional Year over Per ASK at items for the year was €3,230 million, a €280 million € million 2018 year ccy improvement from last year. The Group’s adjusted operating Ownership costs 2,144 5.7% (0.3)% margin also improved 0.2 points to 14.4 per cent. These results reflect a strong revenue performance from a better See note 5 in our Financial statements for more on our macro-economic environment with improvements in our main

ownership costs. Additional Information strategic markets. Management continued to focus on Number of fleet customer proposition, operational resilience and delivery of Higher/(lower) cost savings. This was partially offset by higher costs from ATC disruption, while our non-fuel unit cost trend keeps Year over Number of fleet 2018 year improving from structural agreements on pensions and productivity. This performance reflects the Group’s drive Shorthaul 380 6.4% towards achieving a competitive cost base with improved Longhaul 193 2.1% productivity and management initiatives, aligned with an 573 4.9% improved focus in customer satisfaction, brand value and resilience of our operational model. Non-fuel unit costs At constant currency, total non-fuel unit costs decreased 0.8 per cent. Adjusted by the ‘Other revenue’ (MRO, BA Holidays, Avios product redemption) category in the income statement and currency, the reduction was 2.5 per cent. Adjusted non-fuel unit cost improved at British Airways, Iberia and Aer Lingus from efficient growth and management initiatives. At Vueling adjusted non-fuel unit costs rose, impacted by the challenging ATC environment increasing disruption costs significantly. Exchange impact before exceptional items Exchange rate movements are calculated by retranslating current year results at prior year exchange rates. The reported revenues and expenditures are impacted by translation currency from converting results from currencies other than euro to the Group’s reporting currency of euro, primarily British Airways and Avios. From a transaction perspective, the Group performance is impacted by the fluctuation of exchange rates, primarily exposure to the pound sterling, euro and US dollar. The Group generates a surplus in most currencies in which it does business, except the US dollar, as capital expenditure, debt repayments and fuel purchases typically create a deficit which is managed and partially hedged. At constant currency, the Group’s operating profit before exceptional items would have been €129 million higher. The Group hedges its economic exposure from transacting in foreign currencies. The Group does not hedge the translation impact of reporting in euros.

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Financial performance by Brand Financial performance by Brand British Airways Aer Lingus Capacity £ million € million

Aer Lingus Higher/ Higher/ 2018 (lower) 2018 (lower) 1.8% British Airways 11.5% 8.9% Iberia ASKs 184,547 2.5% 29,030 10.0% Vueling Seat factor (per cent) 82.5 0.7pts 81.0 (0.1)pts 21.0% Other Group companies Passenger revenue 11,620 5.2% 1,952 8.6% 56.8% Cargo revenue 769 4.3% 54 14.9% Other revenue 631 18.4% 14 7.7% Operating profit before exceptionals Total revenue 13,020 5.7% 2,020 8.8% Fuel, oil costs and emissions Aer Lingus charges 2,927 14.7% 382 20.9% 2.6% British Airways Employee costs 2,535 (1.5%) 373 8.1% 6.2% 9.4% Iberia 13.5% Supplier costs 4,586 2.8% 774 2.7% Vueling Other Group EBITDAR 2,972 9.0% 491 11.1% companies Ownership costs 1,020 4.2% 186 6.9% 68.3% Operating profit before exceptional items 1,952 11.6% 305 13.8% Adjusted operating margin 15.6% 0.8pts 16.8% 0.6pts

Passenger yield (£ pence or € cents/RPK) 7.64 1.9% 8.30 (1.1%) Unit passenger revenue (£ pence or € cents/ASK) 6.30 2.7% 6.73 (1.2%) Total unit revenue Aer Lingus operating profit was €305 (£ pence or € cents/ASK) 7.06 3.2% 6.96 (1.2%) million, a record performance and an Fuel unit cost improvement of €37 million over last (£ pence or € cents/ASK) 1.59 11.9% 1.31 9.8% year. Capacity increased 10.0 per cent Non-fuel unit costs from additional flying to new routes (£ pence or € cents/ASK) 4.41 (0.9)% 4.59 (4.8%) such as Philadelphia and Seattle. Total unit cost Despite the significant increase in (£ pence or € cents/ASK) 6.00 2.2% 5.91 (1.9%) capacity, Aer Lingus’ adjusted operating margin rose 0.6 points to 16.8 per cent. British Airways operating profit was £1,952 million, excluding exceptional items, up Passenger unit revenues decreased at £203 million over the prior year on a capacity increase of 2.5 per cent. outturn rates from lower yields, while Passenger unit revenues rose for the year from higher passenger load factors and non-fuel unit costs improved. yields. Yields improved with strong business sector performance. Aer Lingus achieved significant cost British Airways’ non-fuel unit costs improved during the year; savings were made savings through efficient growth with in several areas including the head office function, engineering through outsourcing higher productivity and from cost and property rationalisation. initiatives. This included areas such as procurement and handling. Overall, British Airways’ adjusted operating margin improved 0.8 points to 15.6 per cent. See page 23 for more on Aer Lingus’ performance and future plans. See pages 18-19 for more on British Airways’ performance

44 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Financial performance by Brand Capacity Iberia Vueling € million € million Aer Lingus Higher/ Higher/ 1.8% British Airways 11.5% 8.9% 2018 (lower) 2018 (lower) Iberia ASKs 68,179 7.1% 37,431 8.9% Vueling 21.0% Seat factor (per cent) 85.5 1.4pts 85.4 0.7pts Other Group companies

56.8%

Passenger revenue 3,765 5.9% 2,377 13.0% Financial Statements Cargo revenue 251 3.7% – – Other revenue 1,166 9.6% 21 (8.7%) Operating profit before exceptionals Total revenue 5,182 6.6% 2,398 12.7% Fuel, oil costs and emissions Aer Lingus charges 1,023 10.5% 489 14.3% 2.6% British Airways 6.2% 9.4% Iberia 13.5% Employee costs 1,091 3.6% 278 19.3% Vueling Supplier costs 2,173 6.2% 1,160 15.0% Other Group EBITDAR 895 7.3% 471 3.1% companies

Ownership costs 458 0.0% 271 0.7% 68.3% Additional Information Operating profit before exceptional items 437 16.2% 200 6.4% Adjusted operating margin 10.0% 0.4pts 11.8% (1.0)pts

Passenger yield (€ cents/RPK) 6.50 (2.8)% 7.43 2.9% Unit passenger revenue (€ cents/ASK) 5.55 (1.1)% 6.35 3.8% Total unit revenue (€ cents/ASK) 7.60 (0.3)% 6.41 3.6% Fuel unit cost Iberia’s operating profit before (€ cents/ASK) 1.50 3.2% 1.31 4.9% exceptional items was €437 million, up Non-fuel unit costs by €61 million versus last year, achieving (€ cents/ASK) 5.46 (2.2)% 4.57 4.0% an adjusted operating margin of 10.0 per Total unit cost cent. Capacity for the year was up 9.6 (€ cents/ASK) 6.96 (1.1)% 5.87 4.2% per cent, with a reduction in passenger unit revenue from lower yields partially Vueling’s operating profit was €200 million an increase of €12 million despite facing offset by higher passenger load factor. significant operational disruption from ATC regulations and strikes. Its adjusted operating margin of 11.8 per cent, was 1.0 points down versus last year. On the cost side, non-fuel unit costs reduced. Employee unit costs and Vueling developed its network strategy throughout 2018 and has strengthened its productivity improved through position in key markets. Demand in these markets remained strong, passenger unit efficiency initiatives as part of Iberia’s revenues, passenger load factors and yields improved versus last year. Plan de Futuro II. Vueling’s non-fuel unit costs increased significantly primarily from ATC disruption. In 2018, Iberia’s Other revenue also Vueling’s NEXT programme continued to target operational improvements and cost increased by 9.6 per cent, primarily from saving initiatives to address the challenging ATC environment, however operating its MRO business. margin suffered. See pages 20-21 for more on See page 22 for more information on Vueling’s performance and future plans. Iberia’s performance

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Exceptional items Profit after tax and Earnings per share (EPS) For a full list of exceptional items, refer to note 4 of the Profit after tax before exceptional items was €2,481 million, up Financial statements. Below is a summary of the significant 11.2 per cent. The increase reflects a strong operating profit exceptional items recorded. performance with higher unit revenues and lower non-fuel During the year, the Group recognised an exceptional net unit costs more than offsetting the significant rise in fuel unit operating credit of €448 million reflecting: costs. Fully diluted earnings per share before exceptional items is one of our key performance indicators and increased €678 million net pension credit following the amendments to by 15.1 per cent also benefitting from the positive impact of British Airways’ NAPS and BARP pension plans noted the share buyback programme. previously, reducing the defined benefit liability offset by the related cash costs Profit after tax and exceptional items was €2,897 million (2017: €2,009 million), up 44.2 per cent. €136 million restructuring costs related to British Airways’ See note 10 in our Financial statements for more information transformation plan aimed to develop a more efficient and on our EPS. cost effective structure, and €94 million charge in employee costs to equalise the effects Dividends of Guaranteed Minimum Pensions at British Airways. The Board is proposing a final dividend to shareholders of 16.5 euro cents per share, which brings the full year dividend In 2017, the Group recognised an exceptional charge of to 31 euro cents per share. Given the Group’s strong cash €288 million related to restructuring costs at British Airways position the Board is also proposing a special dividend of and Iberia. 35 euro cents per share, returning approximately €700 million Non-operating costs and taxation to shareholders. Subject to shareholder approval at the Net non-operating costs after exceptional items were €191 Annual General Meeting, the final and special dividends will be million, up from €181 million last year. In 2018, the Group paid, on July 8, 2019 to shareholders on the register on July 5, recognised a net financing pension credit relating to defined 2019. benefit schemes compared to a charge in 2017. Closure of the Dividend policy statement British Airways NAPS to future accrual resulted in an In determining the level of dividend in any year, the Board accounting surplus and a net financing credit. This €55 million considers several factors, including: improvement was offset by a €57 million swing in net foreign exchange on the retranslation of monetary non-current assets • Earnings of the Group; and liabilities. • On-going cash requirements and prospects of the Group See note 8 in our Financial statements for more on our and its operating companies; non-operating costs. • Levels of distributable reserves by operating company and Taxation efficiency of upstreaming options; • Dividend coverage; and The vast majority of the Group’s activities are taxed in the countries of effective management of the main operations • Its intention to distribute regular returns to its shareholders - UK, Spain and Ireland, with corporation tax rates during 2018 in the medium and long-term. of 19 per cent, 25 per cent and 12.5 per cent respectively. The The Company received distributions from each of the four Group’s effective tax rate for the year was 16.9 per cent main airlines in 2018, although due to accumulated losses in (2017: 19.0 per cent) and the tax charge after exceptional certain companies they were not all recorded as distributable items was €590 million (2017: €472 million). income. Distributions may trigger additional pension The Group continues to offset prior year tax losses and other contributions if higher than pre-agreed thresholds, see note tax assets against its current year taxable profit. In 2018 30 of the Financial statements. the Group paid corporation taxes of €343 million (2017: Notwithstanding these factors, the Company’s distributable €237 million). reserves position was strong, with €5.7 billion available at See note 9 in our Financial statements for more information on our tax. December 31, 2018 (2017: €6.1 billion).

46 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Liquidity and capital risk management Cash flow IAG’s objectives when managing capital are to safeguard the € million 2018 2017 Movement Group’s ability to continue as a going concern, to maintain an EBITDAR before exceptional optimal capital structure to reduce the cost of capital and to items 5,374 5,022 352 provide sustainable returns to shareholders. In November Rentals (890) (888) (2) 2018, S+P and Moody’s assigned IAG with a long-term investment grade credit rating with stable outlook. EBITDA before exceptional items 4,484 4,134 350 The Group monitors capital using adjusted net debt to Net interest (112) (93) (19) EBITDAR and liquidity. In 2018, the Group’s adjusted net debt Financial Statements to EBITDAR increased slightly to 1.6 from 1.5 in 2017, although Taxation (343) (237) (106) well within an acceptable range. EBITDAR improved and Acquisition of PPE and adjusted net debt increased. Adjusted net debt rose by €596 intangible assets (2,802) (1,490) (1,312) million to €8,355 million reflecting a lower cash position from Sale of PPE and intangible the repayment of perpetual securities and slightly higher assets 574 306 268 long-term borrowings from an increase in debt for fleet. Equity free cash flow 1,801 2,620 (819) EBITDAR rose €352 million versus last year reflecting the Group’s profitable growth as the EBITDAR margin increased Working capital and other 0.1 pts with ASKs up 6.1 per cent. non-cash 270 623 (353) Pensions and restructuring (1,063) (914) (149)

The Group’s equity free cash flow (EqFCF) was €1,801 million Additional Information in 2018, lower than last year by €819 million and lower than Proceeds from long-term our average long-term planning goals, impacted by the timing borrowings 1,078 178 900 of CAPEX. EBITDA generation was strong at €4,484 million Repayments of long-term while net CAPEX was high at €2,228 million. borrowings (1,099) (973) (126) In 2018, the Group’s net CAPEX included delivery of thirty-two Dividend paid (577) (512) (65) new aircraft, five Boeing 787s, two Airbus A350s, four Airbus Share buyback (500) (500) – A330s and 21 Airbus from the A320 family. This capital Other investing 61 72 (11) expenditure has been partially offset by €574 million of Other financing (312) (21) (291) proceeds from the sale and leaseback of thirteen new aircraft (ten Airbus A320 family, one Boeing 787 and two Airbus Cash (outflow)/inflow (341) 573 (914) A330). In 2017, the Group took delivery of 10 new aircraft, Opening cash and deposits 6,676 6,428 248 partially offset by €287 million of proceeds from the sale and Net foreign exchange (61) (325) 264 leaseback of seven new aircraft. Cash and deposits 6,274 6,676 (402) During the year, British Airways secured a sale and leaseback by way of a $609 million EETC bond issue to fund aircraft Higher/ € million 2018 2017 (lower) deliveries. The bonds were combined with Japanese Operating Leases with Call Options (“JOLCO”) of $259 million. British Airways 2,780 3,182 (402) The total sum raised was $868 million. The transaction Iberia 1,191 1,167 24 includes Class AA and Class A Certificates with an underlying Aer Lingus 891 1,025 (134) collateral pool consisting of 11 aircraft. Vueling 564 681 (117) Movements in Working capital and other non-cash generated IAG and other Group €270 million in free cash flow (2017: €623 million) primarily companies 848 621 227 from the Group’s growth with higher sales in advance of Cash and deposits 6,676 (402) carriage and impacted by the timing of prepayments. 6,274 Pensions and restructuring reflect payments made to the British Airways APS and NAPS pension plan schemes and restructuring payments for British Airways’ and Iberia’s transformation plans. In 2018, a €182 million onetime payment was made in relation to the closure of the NAPS scheme to future accrual. In 2018, the cash Dividend paid reflects the 2017 final dividend and the 2018 interim dividend.

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During the year IAG carried out a second share buyback Off balance sheet arrangements and capital commitments programme as part of the corporate finance strategy to return The Group has entered into commercial leases on certain cash to shareholders while reinvesting in the business and property and equipment but primarily for aircraft. Contracts managing leverage. The programme total was €500 million range in duration for up to 13 years for aircraft with total (2017: €500 million) and IAG acquired 65,956,660 ordinary payments of €8,664 million (2017: €7,642 million); see note 23 shares (2017: 74,999,449), which were subsequently for further details on the timing. The Group’s adjusted net cancelled. The Group has returned over €1 billion to debt metric includes an estimation for the debt related to the shareholders in 2018 and €2.7 billion since 2015. aircraft operating leases (‘capitalised aircraft lease costs’) by Taking these factors into consideration, the Group’s cash taking the current year’s aircraft operating lease cost outflow for the year was €341 million and after net foreign multiplied by 8. exchange differences, the decrease in cash net of exchange Capital expenditure authorised and contracted for amounted was €402 million. Each operating company holds adequate to €10,831 million (2017: €12,137 million) for the Group. Most of levels of cash with balances exceeding 20 per cent of this is in US dollars and includes commitments until 2023 for revenues, sufficient to meet obligations as they fall due. 92 aircraft from the Airbus A320 family, 12 Boeing 787s, 4 Net debt and adjusted net debt Boeing 777s, 41 Airbus A350s, and 4 Airbus A330s. Net debt Overall, the Group maintains flexibility in its fleet plans with Higher / the ability to defer, to exercise options and to negotiate € million 2018 2017 (lower) different renewal terms. IAG does not have any other off- Debt (7,331) (8,515) (1,184) balance sheet financing arrangements. Cash and cash equivalents See pages 14-17 for our key performance indicators. and interest bearing deposits 6,676 6,428 248 Net debt at January 1 (655) (2,087) (1,432) See pages 183-185 for our alternative performance measures. (Decrease)/increase in cash net of exchange (402) 248 (650) Net cash outflow from repayments of debt and lease financing 1,099 973 126 New borrowings and finance leases (1,078) (178) (900) Decrease/(increase) in net debt from regular financing 21 795 (774) Exchange and other non-cash movements (199) 389 (588) Net debt at December 31 (1,235) (655) (580) Capitalised aircraft lease costs (7,120) (7,104) 16 Adjusted net debt at December 31 (8,355) (7,759) 596

The Group’s net debt position increased by €580 million reflecting a reduction in cash, adverse exchange and a net neutral impact from regular financing with repayments during the year offsetting new borrowings.

48 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Regulatory environment Strategic Report Corporate Governance

The international and strategic nature As the Withdrawal Agreement is UK aviation policy of the airline sector, along with its safety subject to ratification by the UK and On 26 June the UK Parliament voted to and security critical requirements, EU parliaments, both the European designate the Government’s Airports means that it will always be subject to Commission and the UK Government National Policy Statement which a wide range of regulatory controls. published separate plans to allow air recommends a new runway should be IAG monitors and, where possible, services to continue in the event that constructed to the north west of contributes to global, regional and the Withdrawal Agreement (or an London Heathrow. IAG strongly national regulatory developments where amended version of it) cannot be supports the expansion of Heathrow as they affect its business. The UK and EU ratified. These include mechanisms to

a very positive development for its Financial Statements Policy agenda in 2018 has been widely permit flights between the UK and the business and for the wider UK economy. dominated by the developing process EU and recognition of each other’s As in the run up to the designation, IAG for the UK’s leaving the European Union. safety certification, approvals and has continued to challenge the Other major issues in the UK have been security regimes. As part of this, the excessive costs of the proposals put the parliamentary approval of the EU is in the process of adopting a forward by the airport’s operator, HAL, National Policy Statement that set out Regulation on basic connectivity and has continued to engage with the the policy to expand Heathrow Airport, between the EU and UK that may result CAA to reinforce the need for it to act and the publication of a Green Paper in some restrictions on code share to ensure that airport prices are kept describing the Government’s proposed flexibility. In addition, in November the down to allow the project to be aviation strategy and which includes UK signed new air services agreements commercially viable. plans for managing sustainable with the USA and Canada to replace Additional Information growth and for a customer charter existing EU-wide agreements once the On 17 December the UK published a for airline passengers. UK leaves the EU, securing market Green Paper for a future aviation access and regulatory arrangements for strategy to 2050. This sets out a range Brexit the future. of potential policy positions including Following the UK referendum decision in measures to deliver sustainable growth, 2016, the UK is expected to leave the EU IAG has had detailed and constructive to address the perceived needs of on March 29, 2019. The Group has engagement with its national regulators passengers and to encourage access to continued to engage extensively with and governments about ownership and new markets. IAG is engaging fully with the relevant authorities to ensure IAG’s control. Those discussions will continue, the programme for consultation. views on post-Brexit aviation including with the European Irish aviation policy arrangements are understood and taken Commission, and IAG remains confident into account. This has included frequent that its operating companies will comply IAG broadly welcomes the dialogue with the UK, Spanish and Irish with relevant ownership rules post infrastructure development plans governments, as well as the European Brexit. IAG is a Spanish company, its proposed by Dublin Airport which Commission and Members of the airlines have long established AOCs and gives effect to the Irish National European Parliament. The completion of substantive businesses in Ireland, Aviation Policy objective to develop a Withdrawal Agreement between the France, Spain and the UK and IAG has Dublin Airport as an international hub. negotiators confirmed that there would had other structures and protections in The wider economic benefits associated be no change to aviation arrangements its by-laws since it was set up in 2011. with such infrastructure investment were detailed in an economic impact until the end of the transition period on IAG’s assessment remains that, even study conducted in 2018 and estimated December 31, 2020 and that the future in the event of no-deal, Brexit will have to contribute an additional €18bn to relationship between the parties would no significant long-term impact on Ireland’s GDP by 2033. include a comprehensive air its business. transport agreement. IAG, through Aer Lingus, continues to participate actively in the Irish Government’s National Civil Aviation Development Forum to ensure its views on Irish aviation regulatory matters, aviation policy and Brexit are heard.

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Spanish aviation policy Delays to policy making must be seen Spain is forecasting GDP growth of against the background of an urgent 2.3 percent in 2019, above the forecast need for action – that IAG has EU average with positive prospects highlighted – to deal with significant for the aviation industry. In line with bottlenecks in the European system. As announcements at the December traffic continues to grow, congestion at 2018 Council of Ministers, the Spanish key points in the airspace and at major Government published a decree European airports is an increasing focus including contingency measures for for IAG, working closely with its trade aviation, in the event that there is no association A4E. The Group has deal on Brexit so as to secure the continued to highlight the pernicious rights of Spanish citizens and airlines. impacts of air traffic controller strikes on A significant regulatory decision during consumers, to urge the reform of 2018 benefited the airline sector when it airspace to make the best use of was announced that AENA´s airport existing resources among air navigation charges will be frozen during 2019, and service providers and to seek the reform that ENAIRE is also lowering its en route of the out of date and ineffective charges by 12%. This reduction will save regulation on airport charges. airlines collectively c.100 million euros. IAG has also continued to provide input European aviation policy to the European Commission’s air service agreement negotiations with European aviation policy has been “third countries”. In 2018 these have dominated by the Brexit process during included a further round of talks with 2018. This has compounded the existing Qatar and completing a new agreement delays to EU legislation, and the reform with Tunisia. of existing laws, due to disagreements over Gibraltar and, as a result, limited progress has been made in key policy areas, such as passenger rights. However, the European Commission has continued to consult on several aspects of policy including the future of the aviation market overall. IAG continues to monitor and contribute to this activity.

50 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 SUSTAINABILITY

Leading the way on carbon Strategic Report commitments Corporate Governance

“We are proud of our achievements on carbon reduction, within IAG and as a leader in the global

industry. But we are Financial Statements under no illusions. There is much more to do.”

Antonio Vázquez Chairman Additional Information

Our industry cannot hope to grow We are making good progress within We want to spread the message as sustainably unless we take our our own operating airlines. In 2018 we widely as possible. In November, as part environmental responsibilities seriously made important steps towards of preparations for British Airway’s and in 2018 we saw good progress both achieving carbon neutral growth from centenary, we launched our “Future of within IAG and in our sector. 2020, particularly under the CORSIA Fuels Challenge” to UK universities. The scheme, for which baseline monitoring task: to work out how to make the UK a The challenge we face was made has now started. world leader in producing sustainable explicit in a United Nations Inter- aviation fuels. Governmental Panel on Climate Change On the operational front, our flight (IPCC) report last October identifying carbon efficiency increased from 92.3 We continue to improve our the need to avoid greater than 1.5 gCO2 /pkm in 2017 to 91.9 gCO2/pkm Sustainability reporting. We have degree temperature rise by 2050. last year. We are confident we remain embraced the recommendations of the Task Force on Climate Related Financial We have always believed our industry on track to meet our 2020 target of 87.3 gCO /pkm, but are keeping our Disclosure and enhanced our Carbon has a full part to play in the global 2 performance under close review. Disclosure Project (CDP) reporting, reduction of CO emissions and we’re 2 earning B management level as a result. proud to have been a lead player in In 2018 our fuel efficiency programmes some significant initiatives. Aviation is delivered 65,000t of CO2 savings and Great energy is going into our the only sector to have agreed to we made progress in implementing sustainability programme as the reduce net carbon emissions, GoDirect Fuel Efficiency software, which following pages attest. introducing a cap from 2020 and aiming should bring further improvements in I can assure you it will remain a major for a 50% cut by 2050. The industry has coming years. New aircraft joining our priority for IAG in the years ahead. also set up the first global carbon fleets delivered up to 20% lower carbon offsetting scheme, CORSIA, to achieve emissions and a reduction of up to 50% Antonio Vázquez these goals. in noise over the aircraft they replaced. Chairman IAG remains a strong advocate for In April, the UK Government included change. In December, along with other Sustainable Aviation Fuels in the international organisations, we pressed Renewable Transport Fuel Obligation, the UK Government to support a Net providing incentives to produce these Zero Emissions target by 2050. We fuels in the UK. In April, our have also urged the EU to redesign waste-to-jet fuel project with Velocys European airspace, a move that would won a Government development grant cut emissions by 12% or by 20 million and, in December, we announced tonnes a year. This is a very good idea plans to build a production facility in and only needs political will to South Humberside. become real.

www.iairgroup.com 51 SUSTAINABILITY CONTINUED

Sustainability overview Sustainability strategy and assessment of risks and the Sustainability forms part of our implementation of appropriate controls Section contents: business strategy and is fundamental and measures. At the Group level, IAG Sustainability overview: governance, to our long-term growth. We have set has a Directors Selection and Diversity strategy, materiality, targets, our vision to be the world’s leading Policy that sets out the principles that stakeholder engagement, disclosures, airline group on sustainability and govern the selection process and the challenges and opportunities, climate we are committed to minimising approach to diversity on the Board of related scenarios, UN sustainable our environmental impact delivering Directors and the Management development goals, future focus and best practice and demonstrating Committee of IAG. progress since last year. thought leadership to drive global IAG also has a Group-wide Equal Sustainability performance: improvements in the aviation Opportunities policy (Group Instruction performance trends against our most industry’s sustainability performance. 4) intended to address and eliminate material issues including climate, fuel We have aligned our sustainability discrimination and promote equality efficiency, energy, noise, waste, air programmes to IAG’s strategic priorities of opportunity regardless of age, quality, customers and workforce. and value propositions: gender, disability, ethnicity, religion or sexual orientation. Sustainability in action: summary of key 1. Strengthening a portfolio of world- actions in 2018 relating to; climate, fleet, class brands and operations Due to our diverse Operating Companies in the Group, all sustainable aviation fuels, carbon fund, • Ensuring customers have visibility training policies and programmes are fuel efficiency, waste, noise, air quality, of, and are engaged in, our implemented at Operating Company supply chain, workforce diversity, work sustainability programmes level and each is responsible for experience, accessibility, community 2. Growing global leadership positions giving, modern slavery, occupational determining the specific courses that • Demonstrating industry leadership, health & safety, ethics & integrity and are mandatory within their organisation, advocating for carbon pricing anti-bribery & corruption. the frequency with which training • Maturing our transition pathway courses must be completed, and the Sustainability governance towards low carbon economy employees required to attend. Across Our sustainability programmes are • Leadership in carbon disclosures the Group, the following core corporate co-ordinated at Group level to develop training courses are run by all 3. Enhancing IAG’s common and implement sustainability policy and Operating Companies: integrated platform strategy, establish targets and • Code of Conduct (to be added in programmes and ensure appropriate • Investing in efficient aircraft fleet 2019 with the launch of our new governance and accountability across and delivering best practice in Group Code) all our operating companies. The IAG operational efficiency Management Committee provides the • Innovating and investing to • Compliance with Competition Laws forum for review, challenge and setting accelerate progress in sustainable • Anti-bribery and Corruption strategic direction. Further oversight aviation fuels, future aircraft and low Compliance and direction is provided by the carbon technologies • Data Privacy, Security and Protection IAG Board and the Audit and We measure our progress against our Over 95% of our employees are based Compliance Committee. vision to be the leading airline group on in European countries which comply The IAG Group Sustainability Policy sets sustainability against five strategic aims: with the conventions of the International the context and ambition for our • Clear and ambitious targets relating to Labour Organisation (ILO) covering sustainability programmes. It covers our our most material issues subjects that are considered as fundamental principles and rights at Group policies and objectives, • Low carbon transition pathway work: freedom of association and the governance structure, risk management, embedded in business strategy strategy and targets on climate change effective recognition of the right to • Management incentives aligned to and noise, sustainability performance collective bargaining; the elimination delivering low carbon transition plan indicators, communications and of all forms of forced or compulsory stakeholder engagement plans. • Leadership in carbon disclosures labour; the effective abolition of • Accelerating progress in sustainable child labour; and the elimination of In addition, we have continued to make aviation fuels, future aircraft and low discrimination in respect of progress with the adoption of the IATA carbon technologies employment and occupation. Environmental Assessment (IEnvA) programme. IEnvA is the airline industry Workforce governance and training version of ISO14001 tailored specifically The structure of the Group means that for airlines and fully certified by the each Operating Company has International Standards Organisation responsibility for the policies and (ISO). We expect Vueling and British procedures relating to its direct Airways to achieve Phase 1 certification workforce, including the identification early in 2019 and Iberia later in the year.

52 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Materiality In autumn 2017 we completed a materiality analysis performed in line with Global Reporting Initiative Sustainability Reporting Guidelines as well as benchmarking with other materiality frameworks. We engaged a range of our principal external stakeholders including investors, corporate customers, suppliers and NGOs. The charitable trust Business in the Community was appointed to provide objective oversight of the process; facilitating workshops, reviewing interview feedback and preparing a materiality matrix. In 2018 IAG worked with the Global Reporting Initiative (GRI) and the International Air Transport Association (IATA) to develop a GRI Sectorial Guidance Handbook for airlines. This will improve consistency and allow comparisons across the industry. The issues identified by IATA and GRI for the airline sector are aligned with the issues we identified for IAG. Financial Statements IAG Sustainability material issues Local Impacts and Environment development Workforce Future competitiveness Corporate governance • Climate change (including • Noise • Employee satisfaction • Financial performance (short • Compliance with legislation emissions, fleet modernisation, • Local economic • Diversity and equality term investor returns and long and regulation fuel efficiency and Sustainable impacts (job creation) • Talent management term sustainability) • Supply chain management Aviation Fuels) • Air quality • Customer satisfaction • Energy use • Community engagement & • Carbon pricing • Waste charitable support • Innovation, research and development Additional Information

All of these issues are addressed in this the potential introduction of forums such as the Sustainable Aviation report either in the ‘Sustainability management incentives aligned to our Fuels Users Group. performance’ table where specific carbon targets to improve the alignment We partner with suppliers, for example performance metrics are reported or in of our business strategy and we are collaborating with fuel suppliers the ‘Sustainability in action’ section decarbonisation pathway and therefore and waste companies to develop where we describe our most recent support delivery of our climate change technology and production facilities for work relating to these topics. and fuel efficiency targets. sustainable aviation fuels and with Air Water and biodiversity are currently not IAG noise target: Traffic Control authorities and Airport assessed as material for IAG based on Operators to achieve more fuel-efficient • To reduce noise per flight by 10% the scale of our impacts in these areas flight operations. We are also working by 2020 compared to 2015 based and the relative importance assigned with aircraft manufacturers to improve on average aircraft noise versus other issues assessed by our fuel efficiency. certification standards. stakeholders. However, we keep this Stakeholder engagement We engaged our top five corporate under regular review. customers who contract with British We actively engage with industry Airways and Iberia on large business Sustainability targets partners and associations, policy travel accounts in our materiality study For our Group sustainability targets we makers, shareholders, investors and and engage with other customers focus on two material aspects: Climate governments to influence policy and though CDP supply chain disclosures and Noise. Our airlines have additional drive action to meet our sustainability and customer sustainability surveys. targets associated with other non- objectives. financial measures including waste, Finally, we engage with communities We lobby governments at the domestic, energy efficiency, punctuality, customer around our main hubs such as by European and global scale and actively net promoter score and diversity, participating in airport community participate in International Civil Aviation among others. forums to manage noise performance organisation (ICAO) programmes to and engaging local schools in sports, IAG climate targets: develop global policy for aviation and charity and learning events. • 10% improvement in fuel efficiency to environment including on aviation carbon targets, carbon pricing and Disclosures 87.3 gCO2/pkm by 2020 versus sustainable aviation fuels. baseline of 97.5 gCO2/pkm in 2014. Since 2011, IAG’s sustainability reporting • Carbon neutral growth from 2020. We participate in a range of industry has been based on our assessment of coalitions and associations to develop which metrics are material to our • Net reduction of 50% CO2 emissions by 2050 versus 2005. common policy positions and enhance business with GRI G4 Sustainability our lobbying effectiveness. These Reporting Guidelines as a secondary In addition, we are calling for include Sustainable Aviation, Airlines 4 reference point. We review emerging Government and industry support for a Europe, IATA and Air Transport Action disclosure standards to ensure we target of net zero CO emissions by 2 Group (ATAG) as well as specialist disclose relevant and meaningful data 2050. We are also developing details for

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about our sustainability performance. Sustainability challenges In 2018 we followed the TCFD six This includes compliance with our and opportunities step process to consider two obligations under Directive 2014/95/EU Sustainability challenges and contrasting scenarios: on non-financial reporting and its opportunities including those related • 2⁰C scenario, consistent with meeting transposition in the UK and Spain. to climate are assessed in line with IAG the Paris Agreement Goal In October 2016, the UN Global Enterprise Risk Management (ERM) (Representative Concentration Sustainability Standards Board methodology for likelihood (remote, Pathway ‘RCP 2.6’) introduced new GRI Sustainability possible, probable and likely) and • 4⁰C scenario as an alternative high Reporting Standards to replace the impact (manageable, moderate, serious emission scenario (RCP 8.5) previous G4 version by July 2018. Our and critical). We considered the implications of these sustainability performance indicators are Risks relating to people and employee two climate scenarios on our business based on the GRI standards and are relations and safety and security are in 2030, assuming we have the same selected to reflect performance against identified as principal risks and are business activities as we do today. our material issues. described within the business and 2030 was selected as a nearer term In addition to the disclosures made in operational risks of our ERM framework. consideration en-route to 2050, which our Annual Report and Accounts and We have identified and assessed longer is the target year for our 50% net CO2 Management Report, we disclose term climate-related challenges and reduction target. non-financial information in several opportunities for IAG through our ERM The analysis included an initial frameworks including CDP (previously process, materiality review and the qualitative assessment of potential IAG the Carbon Disclosure Project) and the application of scenario analysis in line response in terms of changes to Workforce Disclosure Initiative (WDI). with the TCFD process. business model, portfolio mix, Carbon disclosures We are allocating significant resource investments in transition capabilities and IAG achieved B Management level to environmental risk management technologies and the potential impact status in the 2018 CDP Climate global including investment of over 1 million on strategic and financial plans. disclosure system. The new transport euros over five years in our new fuel Broadly, the 2 degrees scenario services scoring methodology efficiency software and over 400 million demonstrated that IAG would incur introduced in 2018 proved challenging dollars over the next 20 years in additional operating costs, mainly as a for airline responders, particularly in sustainable aviation fuels infrastructure result of the increased cost of carbon or relation to thresholds in scope 1 and 2 development and offtake agreements. other policy interventions. The 4 renewable energy consumption and The IAG Sustainability team is degrees scenario also demonstrated target setting which puts leadership in responsible for identifying and that IAG would incur additional these categories out of reach for airlines. monitoring sustainability and climate- operating costs, but in this case, these We will be working with CDP during related challenges. These are reviewed would more likely arise from increased 2019 to propose a more relevant and by the ERM team and reported at least cost of operational disruption due to progressive assessment on these topics annually to the IAG Management increased frequency of extreme for airline responders. We also achieved Committee and the Audit and weather events. A- Leadership level in the 2018 CDP Compliance Committee of the ratings for Supplier Engagement. Initial outcomes of the exercise have IAG Board. resulted in IAG establishing new Taskforce on climate related Climate related scenario analysis partnerships through our accelerator financial disclosure In line with our commitment to TCFD programme ‘Hangar51’, to deliver In addition, we are pleased to have been we have undertaken climate-related innovations in fuel efficiency and low one of the early signatories to the Task scenario analysis to review the resilience carbon technologies. Other initiatives Force on Climate Related Financial of our business strategies in the context are also being developed. The process Disclosure (TCFD), an initiative led by of climate change. We regard this as has also meant that we have identified the Financial Stability Board which an iterative process and will be and disclosed several new climate- complements the CDP framework and continuing to consider further climate related challenges this year. introduces further steps to promote scenarios and develop more In 2019 we will consider a 1.5 degree the integration of climate-related quantitative conclusions. scenario and potential IAG pathways aspects into our strategy. Further towards achieving net zero emissions details are included in the section by 2050. on sustainability challenges.

54 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Summary of sustainability challenges and opportunities Strategic Report

Type Description and potential impact How we manage it Climate Transition Challenges and Opportunities Emergence of global patchwork of uncoordinated • Managed by allocating resource to engage with national and regional climate policies – regulation Governments, IATA and ICAO to lobby for and help deliver a single effective global carbon pricing Use of inappropriate tax instruments may lead to solution for aviation, CORSIA. Regular updates on competitive distortion including potential carbon progress are provided to the IAG Management Corporate Governance leakage and result in increased compliance costs while Committee and IAG Board. failing to effectively address aviation emissions. Climate regulation – regional application • Supporting implementation of CORSIA through IATA and ICAO and mentoring other airlines to ensure CORSIA has been agreed internationally however the CORSIA is adopted successfully. risk remains of regional regulatory duplication and/or inconsistent application of agreed Monitoring • Supporting development of robust rules for CORSIA Reporting and Verification (MRV) requirements and on Monitoring Reporting and Verification and eligible offsets which could create inequitable costs Emissions Unit Criteria. and competitive distortion. • Lobbying for single tier adoption of CORSIA. Sustainable aviation fuels – regulation • Lobbying to prevent mandates that create competitive distortion, both directly and through IAG believes fuel mandates, if applied, should only be Financial Statements industry organisations at EU and UK levels. applied at Global level. EU and Spanish proposals to mandate proportion of sustainable aviation fuels would • Supporting policy incentives that help deliver SAF at drive production but could force airlines to purchase prices competitive with conventional fuels through SAF at a price premium compared to conventional new technologies reaching scale and becoming cost fuels creating competitive distortion. competitive.

Consumer behaviour challenge and opportunity • Set vision to be the world’s leading airline group on sustainability with ambitious goals on Trends in ethical and sustainability concerns being a carbon efficiency. factor in consumer choices may mean some consumers • Using all the tools at our disposal: modern aircraft,

choose to fly less frequently. Additional Information efficient technology, best operational practice and Opportunity to differentiate our brands by showing sustainable fuels, as well as influencing global policy leadership, innovation and action to mitigate and driving industry-wide action, to minimise our climate impacts. carbon footprint. • Effective communication of our practices to customers and suppliers. Sustainable aviation fuels production opportunity • Ongoing lobbying for sustainable aviation fuel Commercial and environmental opportunity to inclusion and prioritisation in renewable fuel policies source cost effective sustainable fuel and reduce our at the Global, EU, and UK levels. • British Airways investing with partners in waste-to- CO2 emissions thereby reducing compliance costs for CORSIA. jet fuel production projects and launched Future of Fuels challenge to UK universities to accelerate SAF development. Higher carbon price and strong policy incentives • IAG supports ambitious climate targets and effective challenge and opportunity global regulation and strong policies to meet global climate goals. Challenge from higher cost of carbon adding to our operating cost and corresponding opportunity with • Continued investment in modern fleet and stronger business case for investment in low carbon innovations to ensure continual improvement in technologies which would accelerate progress in operational fuel efficiency. decarbonisation pathway. • Forward purchase of carbon credits to protect against price volatility. • Innovation and collaboration on future fuels and carbon technologies through our Hangar 51 accelerator programme.

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Summary of sustainability challenges and opportunities continued

Type Description and potential impact How we manage it Climate physical challenges and opportunities Extreme weather impact on operating costs • IAG climate strategy (all the measures above) and our support for strong global action to tackle For example, increased frequency of high winds, fog climate change. events, storms, turbulence, sustained extreme heat events or stronger jet stream would increase • Partnerships to find solutions to mitigate operating costs by increasing delays, fuel burn and operational disruption. Example is project with requiring additional cooling and maintenance costs. partners in NATS and Heathrow Airport to implement innovative technology, the ‘Time Based Drought-induced water scarcity at outstations Spacing’ system, enabling landing rates at could increase fuel cost with increased potable Heathrow to be maintained in the event of strong water carriage. winds. This has reduced delays, fuel burn and emissions and avoided extra costs due to disrupted operations. Destinations becoming unattractive for visitors • Ongoing lobbying and engagement in projects and initiatives designed to reduce the industry’s impact For example, extreme weather events and physical on climate change. impacts of climate change such as flooding, drought, forest fires, heat waves, algae blooms, coral bleaching, • Teams dedicated to assessing and understanding rising sea levels and reduced snow cover in ski changes in customer demand and managing destinations could make certain destinations less network developments to respond to such changes. desirable and impact customer demand. • Strategy to ensure aircraft and crew flexibility means we are prepared and able to respond to Climate change could also make certain destinations shifting demand profiles. more attractive or accessible to visitors, for example a longer summer season. Other sustainability challenges and opportunities Operational noise restrictions and charges • Investing in new quieter aircraft. Airport operators and regulators apply operational • Continually improving operational practices noise restrictions and charging regimes which may including continuous descents, slightly steeper restrict our ability to operate especially in the night approaches, low power low drag approaches and period and/or may introduce additional cost. optimised departures. • Internal governance and training and external advocacy in UK, Ireland and Spain to manage challenges. Supply chain CSR compliance • Integrity, sanctions and CSR screenings for new suppliers, Know Your Counterparty due diligence Potential breach of sustainability, corporate social for higher risk third parties, Supplier Code of responsibility or anti-bribery compliance by an IAG Conduct, supplier compliance audits. supplier or third party resulting in financial, legal, environmental, social and/or reputational impacts. • Internal governance including training and workshops to identify challenges and mitigation. • Management IT systems for suppliers and higher risk third parties. Environment regulation compliance • Adopting group-wide Environmental Management System, the IATA IEnvA programme. An inadvertent breach of compliance requirements with associated reputational damage and fines. • Internal governance, training and assigning ownership for environmental compliance obligations. • Engaging with carbon market advisors to understand and mitigate compliance challenges and identify future opportunities. Potential target for direct action protests • Close liaison with government agencies, airport operators and commercial organisations to Direct action and civil disobedience protests could assess challenges. disrupt flight operations and/or restrict staff and passenger access. • Contingency planning.

56 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 UN Sustainable Development Goals Strategic Report The United Nations has adopted a plan to “end poverty, fight inequality and injustice, and tackle climate change by 2030.” At the heart of this Agenda 2030 are 17 Sustainable Development Goals (SDGs). Fulfilling these goals will take significant effort by all sectors in society and it is widely recognised business has an important role to play. Aligning with IATA and Sustainable Aviation, we draw links to 9 relevant SDGs to our business, as shown in the table below. We reflect the links to these in our sustainability performance data on the following pages and regard SDGs number 5, 7, 8 and 13 as priority measures, most relevant to IAG.

Goal 3: Goal 7: Goal 11: Corporate Governance Good health and wellbeing Affordable Sustainable cities and and clean energy communities Goal 4: Goal 8: Goal 12: Quality education Decent work and Responsible consumption economic growth and production Goal 5: Goal 9: Goal 13: Gender equality Industry, innovation and Climate action infrastructure

Future focus – progress with priorities set for 2018 and new priorities for 2019 Financial Statements Relevant material issue: Progress against priorities set for 2018 Our priority actions for 2019 Environment • Beginning the first action to • Calling for government and industry support for a net zero implement CORSIA in preparation for emissions pathway. • Climate Change emissions monitoring from January • Developing options for IAG on a net zero emissions pathway. 2019 – see case study. • CORSIA implementation from January, beginning baseline • Using our new fuel efficiency software monitoring and preparing our carbon offsetting strategy. to identify more opportunities for fuel efficiency – see case study.

Future • Driving continual improvement of our • Continuing to invest in innovative sustainable aviation fuels Additional Information competitiveness sustainability disclosures. In 2018 we projects and seek ongoing opportunities following the Future of achieved B in CDP and extended our Fuels Challenge to UK universities. • Investors disclosures to WDI. • Extending our work through Hangar 51 on innovations in fuel • Customers • Improving our external efficiency and low carbon technologies. communications regarding sustainability initiatives: • New IAG website including sustainability page • Airlines updated websites sustainability content • Collaborated with Sustainable Aviation on social media communications • Airlines featuring regular articles in their in-flight magazines relating to sustainability. Corporate • Continuing the roll-out of our • Developing proposals for aligning management performance Governance environmental management system incentives to carbon targets. IEnvA. We continued implementation • Compliance with Vueling and British Airways expected to achieve Phase 1 certification early in 2019.

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Data Governance environmental metrics (where they The scope of our sustainability form less than 1% of material performance data includes all our airline environmental aspects). and air cargo operations except for Our sustainability performance some specific data for LEVEL Austria indicators are based on the GRI and LEVEL France which started standards. operations in summer 2018. LEVEL From 1st January 2019, our airlines have Spain operations (three A330 aircraft) started monitoring, reporting and are included in scope of all our verifying CO emissions data for environment data. LEVEL Austria (four 2 international flights in compliance with A321 aircraft) and LEVEL France (two CORSIA, the ICAO Carbon Offsetting A330 aircraft) are only reported in and Reduction Scheme for relation to ICAO CAEP Noise and NOx International Aviation. measures. The data for the 6 aircraft represents 1.1% of our total fleet in Our emissions data is calculated 2018 (573) and less than 1% of our using UK and Spanish Government Scope 1 emissions. Greenhouse Gas conversion factors for company reporting. Avios and GBS functions, are currently included in scope of our workforce metrics but are not in scope of our

Sustainability performance This performance summary should be considered along with measures reported across the Strategic Report and Management Report to collectively understand our performance against our most material sustainability matters including environment, customers, workforce, social, supply chain and business integrity aspects. In the charts below, the 2018 bar is colour coded: green for in-line with desired direction and red for against desired direction. Indicator improved Indicator not improved

Aspect and link Performance to SDG indicator Description 2018 highlights 2018 Climate Jet fuel1 As commercial aircraft remain reliant • Jet fuel use has increased by 4.26% Million tonnes fuel (Million tonnes) on liquid kerosene for the foreseeable compared to 2017 while our business

future, IAG’s climate change focus is on growth has grown faster – RPK up 9.41 9.02 8.86 8.28

purchasing newer more fuel efficient 7.1%. This shows an increase in fuel 7.93 aircraft, developing sustainable jet fuel, efficiency per unit output.

pursuing operational fuel efficiency and +4.3% supporting CORSIA global carbon offsetting scheme.

2014 2015 2016 2017 2018 Average age of Average age of all aircraft in our fleet • There has been a slight decrease in Years aircraft fleet calculated at the end of the reporting our average fleet age in 2018. This 11.4 year and based on aircraft age from has been mainly driven by 11.3 10.8 10.8 (years) date of manufacture. retirements of aircraft and deliveries 10.5 This is a measure of the rate of new of new generation aircraft. aircraft entry into our fleet. • 42 aircraft introduced. -0.9% • 21 aircraft retired. • Total aircraft fleet at end of December 2018: 573. 2014 2015 2016 2017 2018 Target: 10% improvement by 2020 • The 0.4% improvement in average Flights only CO2 gCO 2/pkm compared to 2014. Grammes of CO carbon efficiency in 2018, gives a emissions 2 per passenger kilometre is a standard rolling five-year average of 1.33% per 97.5 95.6 94.8 intensity industry measure of flight efficiency. year, just less than the industry 92.3 91.9 (gCO2/pkm) Individual airline performance is target of 1.5%. 2020 target: 87.3 gCO2/pkm reported on the relevant pages in • The slightly slower rate of this report. improvement in 2018 is due to the -0.4% rate of fleet renewal as well as challenging operating conditions including disruption caused by European ATC strikes. 2014 2015 2016 2017 2018

1 2018 Climate data provisional subject to further verification for compliance with EU ETS which is completed after publication of this report. As we file this report within two months of year-end, our EU ETS and Scope 1 (direct) emissions data is provisional and will be subject to further verification (to reasonable assurance) after publication of this report. Based on past trends, the difference between provisional and verified data is not material, typically less than 0.05%, but may result in some minor rounding of our 2018 scope 1 emissions data in subsequent reports. 2 New measure in 2018

3 2017 location based figure is restated from previously reported figure (86,390 tonnes CO2e) following revised calculations using new Spanish Government conversion factors. 4 Emissions data for years 2017 and earlier have been third party verified to reasonable assurance for compliance with the EU ETS (covering flights within the European Economic Area). Furthermore, all of British Airways’ Scope 1, 2 and 3 emissions data for years 2017 and earlier have also been third party verified (to reasonable assurance) and complies with ISO14064-3 international reporting standard. 5 Scope 3 data reported 2018 was prepared for CDP report based on 2017 activity. 6 Based on headcount as at December 31, 2018.

58 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Aspect and link Performance Strategic Report to SDG indicator Description 2018 highlights 2018

1 Direct emissions associated with • Scope 1 CO2e emissions have Climate Scope 1 Million tonnes CO2e Direct GHG our flying. increased but at a lower rate than In line with industry commitments activity of the airlines.

emissions 29.99 28.76 • IAG contributed approximately 3 28.26

which we were instrumental in securing 26.40 25.22 (Million tonnes in 2009, we have two targets over million tonnes of carbon reductions through our compliance with the EU CO2e) different timescales: ETS, bringing our net CO emissions +4.3% 1 To achieve carbon neutral growth 2 to c. 27 million tonnes CO e for our international aviation flights 2 2050 net target: 11.62 (provisional pending EU from 2020. ETS verification). Corporate Governance

2 50% net reduction in CO2 emissions 2014 2015 2016 2017 2018 by 2050 versus 2005 baseline (23.24 Targets: million tonnes). Carbon Neutral Growth by 2020 1 -50% net CO2 by 2050 v’s 2005 baseline (23,237,182) Scope 1 We are reporting these measures for • The majority of our GHG emissions Tonnes GHG emissions (% of total Scope1 CO e) Other the first time in 2018. comprise carbon dioxide emitted 2 Previously we have reported all our from aircraft fuel burn. Greenhouse Gas • Emissions of other GHG’s such as 2 greenhouse gas (GHG) emissions using Emissions methane and nitrogen oxide also 0.95%0.05% the carbon dioxide equivalent metric 99% arise from aircraft fuel burn as (CO2e) but have expanded this to reflect stakeholders interest in well as the operation of ground understanding the composition of vehicle fleets. the total. Financial Statements

Carbon dioxide (CO2) 29,694,133

Nitrogen Oxide (N2O) 283,360

Methane (CH4) 15,974

Reduction in Avoided emissions due to initiatives • Efficiency initiatives have resulted in Thousand of tonnes CO2e within any of the three scopes of savings of 65,665 tonnes CO e, (First year reporting this) GHG emissions 2

emissions reporting. For example, equivalent to 0.2% of our Additional Information 2 from initiatives enhanced fuel efficiency techniques scope 1 emissions. (tonnes CO2e) yield scope 1 emissions reductions, • Key initiatives have included changes switching from incandescent to LED in operating procedures and 2018 lighting affects scope 2, and on-board weight savings. encouraging employees to car-share or 65.66 utilise public transport affects scope 3.

Thousand tonnes CO e Buildings electricity. • Fluctuations in trend are influenced 2 Scope 2 (location based) Indirect GHG Scope 2 emissions reported here reflect by airline acquisitions as well as

the trend towards less carbon 3 3 national (location and market based) emissions intensive electricity across Spain, grid mix for UK, Spain and Ireland. Aer 117.67 117.07

(Thousand UK and Ireland. 103.12 Lingus included from acquisition in 92.64 86.25 tonnes CO2e) August 2015. • Our market-based emissions are significantly less than our location The location-based method considers based emissions reflecting the emissions generated by the local -6.9% portion of the Group’s electricity power grid to which our facilities supply being purchased from lower are connected. 2014 2015 2016 2017 2018 carbon sources. 3 The market-based method considers Thousand tonnes CO2e emissions generated by the power (market based) companies that supply our energy and therefore includes factors such as renewables tariffs. 92.86 59.44 61.92 -4.0% 2016 2017 2018

www.iairgroup.com 59 SUSTAINABILITY CONTINUED

Aspect and link Performance to SDG indicator Description 2018 highlights 2018 Climate Electricity Used Consumption of electricity across main • Iberia energy efficiency initiatives Million kWh electricity (million kWh)2 facilities in millions of kilowatt hours. included replacement of light bulbs Includes usage in main offices, hub that delivered the following savings

in electricity usage: 268.4

airports and maintenance facilities. 253.2* • Engine workshop: 2,679,979 KWh • Cargo terminal: 665,180 kWh +6.0%

2017 2018

* 2017 figure not previously reported Percentage Percentage of electricity consumed as • 2018 renewable electricity use % Renewable electricity renewable above that is generated by renewable by airline: sources. The primary source of IAG’s • Aer Lingus 52% electricity2 (%) 54% renewable energy is wind. • British Airways 61%,

IAG aims to increase our overall • Iberia 0% and 42% percentage of renewable electricity • Vueling 0% used as part of our longer-term emissions reduction targets. -22.2%

2017 2018

Energy intensity This metric is designed to monitor our • Group wide electricity usage has Energy intensity per passenger kilometre (gCO e/pkm) per passenger energy efficiency (Scope 2, location increased in 2018 but has been 2 based) as a function of our business slightly outpaced by growth in

kilometre activity (passenger kilometres). It flying activity. 0.46 0.43 (gCO /pkm) complements our flight only emissions 2 • Our energy efficiency shows no 0.35 0.28 intensity metric. change on last year. This is primarily 0.27 due to completion of major energy efficiency projects in 2017 with

minimal changes made in 2018. -3.6% 2014 2015 2016 2017 2018

Million tonnes CO e Scope 3 Other indirect emissions includes • The Scope 3 emissions increased by 2 Other indirect emissions associated with fuel 7.1% in 2018 compared to 2017 production, transportation and partly due to business growth 5 8.44

GHG emissions 7.88

distribution; aircraft manufacturing and from expanding the scope of 7.64 (Million tonnes disposal; waste processing; business data captured. 5.42 CO e) travel and employee commuting; • We actively engage with suppliers to 5.18 2 +7.1% franchises and water consumption. manage and reduce our scope 3 CO2 More categories are now captured. emissions - see stakeholder engagement section. 2014 2015 2016 2017 2018

This metric is a long-term measure to • Revenue per tonne of CO has Economic Revenue per 2 Revenue per tonne CO e track the connection between improved slightly versus last year 2 return versus tonne CO e €/t CO e (0%) 2 economic growth and climate impact driven by the increased load factors 2 climate (€/tonne CO2e of our operations. and the value of cargo carried. 862 811 impact for scope 1 and 2 796 796 796 emissions combined) +1.9%

2014 2015 2016 2017 2018

Noise Average noise This metric measures average noise per • We are in the process of retiring Average noise QC/LTO cycle (Based on Quota flight considering arrival and departure some of our noisiest aircraft and noise for each aircraft type (using UK replacing them with the next

Count and Government Quota Count values which generation of quiet aircraft however 1.11 1.08 1.07 number of are a relative categorisation based on our performance in 2018 declined 1.06 Landing and certified noise levels) and the number slightly due to the increase in Take Off cycles of flights operated in a year. Note: for a longhaul operations driving 2020 versus 2015 single flight a Boeing 747 score would increased weight and therefore QC per year) Target: 1.0 (-10%) be 6.0 whereas an Airbus A320 rating for some of our fleet. +0.9% (current engine option) would be 1.0. 2015 2016 2017 2018

60 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Aspect and link Performance Strategic Report to SDG indicator Description 2018 highlights 2018 Noise Aircraft fleet ICAO Chapter 4 noise certification • Our entire fleet meet ICAO Chapter % ICAO noise standard noise comprises limits of a combination 4 noise certification. of lateral, approach, and flyover • During 2018 we have seen an 100% 99% 99% 99% certification noise levels. increase in Chapter 14 certified 98.7% (ICAO Chapter The ICAO Chapter 4 technology aircraft and expect this to increase 4 and 14) standard for aircraft noise applies to further during 2019 as new 48 +1.0% 50% new aircraft certified from January 1, generation aircraft such as the 46% 46% 2006 and Chapter 14 applies to new Airbus A350 and A320neo join aircraft certified from January 1, 2017. our fleet. +8.7% Corporate Governance 2014 2015 2016 2017 2018 Chapter 4 Chapter 14 Continuous Continuous descent operations (CDO) • Our aim is to have all our airlines % Continuous Descents (UK average) descent employ a smooth approach angle achieve over 80% average across Airline 2013 2017 2018 %VLY allowing aircraft to fly higher for longer UK airports. 2 BA world 94.1 95.7 -0.1 operations compared to stepped approaches. This • Prior to 2016 Iberia and Vueling had 95.6 (%) can help reduce fuel consumption as not been engaged in CDO initiatives BA well as noise for those living under but since then both airlines have domestic 87.0 87.3 88.8 1.5 approach flightpaths. made significant progress and are Aer Lingus 86.8 87.5 86.6 -0.9 continuing their upward trend. Iberia 58.2 84.7 85.4 0.7 • Data does not include Level as they are not currently operating in the UK. Vueling 61.8 76.1 78.9 2.8 UK Financial Statements average 86.1 87.2 88.3 1.1

Source: NATS for Sustainable Aviation. 2013 is baseline year. Waste Average aircraft Cabin waste generated per passenger • In 2018 Vueling average waste per Average cabin waste per cabin waste and split between shorthaul and passenger, including both catering passenger longhaul operations. and cabin waste was 0.19kg (kg/passenger) (shorthaul).

We are working on being able to report 1.57 1.39

this measure as a Group average. • For Iberia, shorthaul average waste 1.32kg

per passenger was 0.14kg and for 1.07 long haul was 1.75kg.

• For BA, shorthaul has improved +23% Additional Information

slightly and longhaul has increased 0.16 0.16 0.08 0.07kg -13%% due to enhanced product offering. 2015 2016 2017 2018 Shorthaul Longhaul * Data is British Airways data only ICAO CAEP is a standard for NOx As 97% of our aircraft meet CAEP 4 % ICAO NO standards Air quality Aircraft fleet • x that meet ICAO emissions from aircraft engines. The NOx, we now focus on meeting standards have become increasingly the more stringent CAEP 6 and

CAEP standard 74% 69%

stringent: the CAEP 8 certified engines 8 standards. 68% 65% for NOx must emit less than half the NOx • In 2018, we also measured average 62% emissions emitted by engines certified to the NOx emissions per landing and +7.3% (%) original CAEP standard. take-off cycle for the first time. The 29%

emissions generated during these 26% The CAEP 4 NOx standard applied to 25% engines manufactured from 1 January phases influence air quality near the 2004, CAEP 6 applied from 2008 and airports that we serve. The figure

CAEP 8 applied from 2014. was 9.44 kg NOx/LTO for 2018. +11.5% We will report trends on this in 2014 2015 2016 2017 2018 ICAO is also developing a standard for future years. particulate matter from aircraft engines, CAEP 6 CAEP 8 expected to come into force in 2020.

www.iairgroup.com 61 SUSTAINABILITY CONTINUED

Aspect and link Performance to SDG indicator Description 2018 highlights 2018 Customers Customer Net Promoter Score (NPS) is • We have established consistent satisfaction a non-financial metric which methodology across our Group to measures the likelihood of a achieve a single blended score. (average Net customer recommending an • The Voice of Customer (VoC) survey 2018 Promoter Score) IAG operating carrier. is the main tool of the customer 16.3 Customer satisfaction with a company’s experience programme and provides products or services is key to a valuable feedback that helps to vly -0.5pts company’s success and long-term identify actionable insights to competitiveness (see Key performance improve the customer proposition. indicators section). Punctuality Punctuality is defined as the • Despite improved operational Punctuality % (within 15 percentage of flights that depart practices across our airlines within 15 minutes of their published punctuality performance has minutes) 81.80 80.90

departure time. declined due to the very challenging 80.20 77.20 75.50 The moment of departure is defined as environment caused by ATC strikes the moment the aircraft’s brakes are in Europe. released in preparation for pushback. -6.3pts As a major drive of customer satisfaction, and we strive to consistently improve our punctuality. 2014 2015 2016 2017 2018 Workforce Employment Manpower equivalent is the number of • Our average manpower equivalent Average manpower equivalent (Average employees adjusted to include grew by 2.1% in a year when our part-time workers, overtime and overall ASKs increased by 6.1%. This manpower contractors. The average manpower has provided improved employment equivalent) equivalent is the mean of the opportunities whilst achieving 64,734 63,387 63,422

manpower equivalent captured productivity gains to help maintain 60,892 quarterly to better reflect seasonality. our competitive cost base. 59,484

Headcount is the actual number of • The Group total headcount as at +2.1% people employed by the Group December 31, 2018, is 71,134 (employees). 2014 2015 2016 2017 2018 Composition2, 6 A part-time employee is one whose • This is being reported for the first Employment type and contract (Employment working schedule is less than 30 hours time in 2018. per week. type, contract A temporary employment contract has Employment type 25% 75% and employee a defined end date. categories) Our employee categories breakdown Part-time Full-time portrays the distribution of the major groups within our workforce “in the Employment 6% 94% air” – Pilots and Cabin Crew – and “on contract the ground” – Airport, Corporate Permanent and Maintenance. Temporary

Employee categories breakdown % 10% 35% 11%

18%

26%

Cabin Crew Airport

Corporate Pilots

Maintenance Employees by This indicator depicts the distribution • As at the end of 2018, IAG had Employees by geographic 2,6 of the Group’s employees according to employees based in 83 countries. location % country 2% 2% the country where they are based. • 95% of the Group’s workforce is 4% 7% based in the European Economic Area.

55% 30%

UK Spain Republic of Ireland Other India USA countries

62 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Aspect and link Performance Strategic Report to SDG indicator Description 2018 highlights 2018 Workforce Gender We are committed to building a • In 2018 we have increased the % Women 6 workforce with diverse perspectives, number of women on our Board

diversity 45% 44% 44% 44% experiences and backgrounds at all from 3 to 4. 43% (% Women at levels throughout the Group. • The proportion of women in senior 33% Board, Senior executive positions across the In 2018 we have increased the 27% 25% 25% 25% 24% 24% Executive, & proportion of women on the Board to Group has increased from 24% to 23% 23% 23% Group level) 33% which was our published objective 27% in 2018. set for 2020. • All Group companies have updated We also have an objective to reach 33% their diversity and inclusion strategies to reflect IAG targets. Corporate Governance women across the Group’s senior 2014 2015 2016 2017 2018 executive levels by 2025. Board Senior Executives Group Age diversity6 An age diverse workforce balances the • IAG reviews age diversity in the Managerial and need for experienced individuals with following ranges: less than 30 years, non-managerial sta maintaining a plan for succession 30-50 years, over 50 years. through the recruitment of new talent. • Further, we have also reported age diversity for staff in managerial and 27.9% 21.6% non-managerial roles. 6.6% 35.9%

57.5% Financial Statements

50.5%

Managerial sta <30 30-50 50+ Non-managerial sta <30 30-50 50+ Employees with This measure is based on the total • This is being reported for the first % of employees with disabilities disabilities2 number of British Airways and Iberia time in 2018. employees with self-declared disabilities. The data is not currently

available for our other operating Additional Information companies. Between them, British 1.4%* Airways and Iberia represent over 80% of the Group’s total headcount.

* British Airways and Iberia employees only

Workforce IAG recognises the importance of • A total of 8,240 employees left the % voluntary and non-voluntary turnover retaining experience and talent in Group in 2018, of which 2,435 were relation to the success of the business non-voluntary. (% voluntary and 8 % 8 % and we report turnover as a measure of 6 %

non-voluntary) the stability of our workforce. 4 % 3% Workforce turnover is measured as the 2 % number of leavers as a percentage of the average number of Group 2016 2017 2018 employees in the year. Voluntary Voluntary turnover occurs when Non-Voluntary employees choose to leave (e.g. % gender and age breakdown of resignation, retirement, voluntary 2018 leavers redundancy) and non-voluntary turnover occurs when employees leave for reasons other than a personal decision (e.g. compulsory redundancy, dismissal, etc.). 49% 31% 35% 51%

34%

Age groups <30 30-50 50+ Gender Women Men

www.iairgroup.com 63 SUSTAINABILITY CONTINUED

Aspect and link Performance to SDG indicator Description 2018 highlights 2018 Workforce Recruitment2 Total number of positions filled • A total of 8,789 positions were filled Positions filled by gender (by age and including both replacement hires and across the Group, of which 52% and age % new positions. were women. 6% gender) 60%

34% 48% 52%

Gender Women Men Age groups <30 30-50 50+ Remuneration2 Average remuneration for members of • The average remuneration for men Average for Average for the board and management committee on the board is considerably higher Board Management (averages Committee broken down by gender. than the average for women because by gender) For 2018, the board had two executive the remuneration of executive directors, both men. Their remuneration directors is much greater than that is made up of basic salary, taxable of non-executive directors and the fee for the Chairman is much higher

benefits (company car and private €1,693,720 than that of other non-executive

health), employer pension €1,396,646 contributions, annual incentive, and directors. The posts of executive

directors and the Chairman are all €923,263 long-term incentive. Including only €835,546 board members who were on the held by men.

Comparing 2018 to 2017, the average €183,288 Board for the whole of 2018, the • €154,804 board also had nine non-executive remuneration for men and women directors, consisting of six men and has fallen substantially because of 2017 2018 2017 2018 the large fall in both the annual three women. Non-executive directors’ Women Overall remuneration is made up of basic fees incentive pay-out and the long-term average and travel benefits. incentive. This affects the executive Men directors on the board, and all The Management Committee excludes members of the management the two executive directors who are committee. board members. Including only Management Committee members who • As there are only two women on were in employment for the whole of the Management Committee the 2018, the Management Committee average remuneration by gender consisted of eight men and two has not been shown for reasons women. Their remuneration is made up of confidentiality. of the same elements as for the executive directors. For 2017, only people who were in service for the whole year are included. The only difference being that the nine non-executive directors consisted of seven men and two women. Gender pay gap2 Gender pay gap refers to the difference • For the first time, in 2018, UK Gender pay gap (median %) (Median based between men’s and women’s median companies with over 250 staff were 2017 earnings (based on hourly rates of pay) required to report on their gender on hourly rates) across the organisation, expressed as a pay gap. This was reported in April British Airways 10% percentage of men’s earnings. 2018 based on data captured at the Avios 32% snapshot date, April 5, 2017. A more in-depth report is available British Airways Holidays 27% for each of our UK companies at: • At British Airways the gender pay British Airways https://gender-pay-gap.service.gov.uk/ gap is largely attributable to the low proportion of women pilots. When Maintenance Cardiff 20% pilots are excluded from the calculations, the pay difference favours women by 1%.

Social Dialogue Employee Relations are an important • IAG has a European Works Council % of employees covered by and Trade factor in improving and maintaining (EWC) which brings together collective bargaining agreement workforce engagement. representatives from the different Unions6 All Group employees have the right to European Economic Area (EEA) 88 88 (% of employees representation through a collective countries in which the Group has 86 covered by bargaining agreement. operations, covering 95% of the Group’s total workforce. EWC

collective -2.3% Our operating companies have well representatives are informed and bargaining established mechanisms for negotiation consulted about matters which may agreement) and dialogue with the unions who impact the Group’s employees in represent their employees. This two or more EEA countries. Two 2016 2017 2018 includes regular review of matters meetings of the EWC were held relating to the health & safety of in 2018. the workforce.

64 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Aspect and link Performance Strategic Report to SDG indicator Description 2018 highlights 2018 Workforce Average hours Calculated by translating training data • In 2018 IAG continued to invest Average hours training per of training for airlines per FTE to show as training in employee training across employee per year hours per Group Average Manpower the Group with a focus on the (average Equivalent (AME). customer proposition. 48.5

employee 45.8 37.3 36.1

training hours 34.9 per year, training +5.9% hours by

employee Corporate Governance

category) 2014 2015 2016 2017 2018 Training hours by employee category % 4% 10%

11%

45%

30%

Cabin Crew Maintenance Financial Statements

Airport Pilots Corporate

A Lost Time Injury (LTI) is a non-fatal • British Airways introduced a new Occupational 2018 Health & Safety2 injury arising out of, or during work safety and security risk management which leads to a loss of productive system, AIR (Audit, Issue, Risk) that Lost Time Injury (Lost time injury work time. enables issues to be reported from Frequency Rate 1.64 frequency rate, The Lost Time Injury Frequency Rate a mobile device or web browser 24 Lost Time lost time severity (LTIFR) is calculated by multiplying the hours a day, seven days a week, Severity Rate 21.12 rate and number of LTIs by 100,000 and anywhere in the world. It provides rich data, in real time, helping to Number of fatalities 1 fatalities) dividing the result by the total number of hours worked in the year. maintain the highest levels of safety and security in a smarter, The Lost Time Severity Rate (LTSR) intuitive way. Additional Information measures the impact of occupational • In 2018 the employees of the Group accidents as reflected in time off work experienced 1.64 LTIs for every by the injured employees. It is 100,000 hours worked and, on expressed as an average of days lost average, each of the LTIs resulted in per LTI. 21.12 days off work. This data does not include • Regrettably, there was one fatality at occupational diseases. British Airways in 2018 due to a road traffic accident within the boundaries of Heathrow airport. Tax Profit / (loss) Profits by country – the Group’s • The increase in profits taxable in our Profits by country €m € million consolidated accounting profit for main countries of operation in 2018 the year split by country in which it reflects improvements in the is taxable. underlying financial performance of our operating companies. In the UK

Subsidies have not been reported as 2,765 they are not considered material. the increase is also driven by an

exceptional gain arising in relation to 1,980 British Airways pension schemes.

512 289 272 252 -28 -67

UK Spain Ireland Others

2017 2018 Income tax paid Taxes paid by country – the Group’s • Total tax payments of €343m are Income tax paid by country € million consolidated cash tax payments for the lower than the expected tax charge year split by country in which they for the Group of €671m primarily were made. because tax relief for pensions in British Airways arises on a cash basis and is not based on accounting 191

profits and losses. 159

• The increase in taxes paid by country 92 78 in our main countries of operation in 61

2018 reflects the increase in profits -1 in our operating companies. The UK Spain Ireland* Others increase in tax paid in the UK is proportionately lower than the 2017 2018 increase in profits because the exceptional gain in relation to pensions in British Airways is not a cash tax item. In Ireland, Aer Lingus offset its remaining tax losses from earlier years against taxable profits in 2017. Its remaining tax liability from 2017 together with its 2018 liability was paid in 2018. * 2017 was not calculated

www.iairgroup.com 65 SUSTAINABILITY CONTINUED

Sustainability in action

Global aviation carbon offsetting scheme Sustainable aviation fuel

The global aviation carbon offsetting scheme CORSIA is Sustainable Aviation Fuels (SAF) will play an important vital in enabling aviation to meet its long-term climate part in enabling the aviation industry to meet its target of reducing net emissions to 50 per cent of 2005 long-term climate goals. IAG remains at the forefront in levels by 2050. In 2018 IAG’s representatives working influencing domestic, regional and international policy to with IATA and ICAO helped finalise the rules governing support the development of SAF and action on SAF is the scheme including those relating to Monitoring, gaining momentum. Reporting and Verification (MRV), the treatment of In 2018, in partnership with Airbus and Total, the delivery Sustainable Aviation Fuels and the rules for airlines of Iberia’s first Airbus A350 aircraft was powered by a and carbon offsetting programmes relating to eligible 10 per cent SAF blend. carbon offsets. All IAG airlines prepared their CORSIA Emissions Monitoring Plans ahead of the deadline of British Airways’ partnership with Velocys and Shell has September 30, 2018 and were ready to begin baseline progressed with Velocys receiving a development grant monitoring from January 1, 2019. from the UK Department for Transport. The project, to build Europe’s first commercial plant to convert We continue to comply with the EU Emissions Trading household waste to renewable jet fuel, has concluded System and while we had hoped that CORSIA would the initial engineering design, feedstock supply feasibility replace aviation’s inclusion in the EU ETS, as agreed in work and secured a site. IAG continues to work with the 2016 ICAO General Assembly resolution, it seems several technology developers to establish a range of likely now that both schemes will run in parallel during supply options for the future. the initial years of CORSIA. We are continuing to work with IATA, our regional and domestic trade associations In anticipation of its centenary celebrations in 2019, and directly with national governments to call for single British Airways also launched the Future of Fuels tier regulation to avoid market distortion and carbon competition open to academics at UK universities. leakage. We are also liaising with the UK Government on Winners will be awarded a £25,000 grant to further their options for the treatment of aviation after the UK exits research along with an opportunity to present their the EU. winning proposal at the industry leading IATA Alternative Fuels Symposium and ATAG Global Sustainable Aviation Summit. The Department for Transport, Sustainable Aviation and Innovate UK have also sponsored a Special Interest Fleet investment and modernisation Group which has provided support to researchers and small and medium-sized enterprises (SMEs) wishing to Fleet modernisation is a core part of IAG’s strategy to develop new SAF projects.

reduce our flight only emissions intensity to 87.3 gCO2/ pkm by 2020 and to reduce noise by 10% per flight achieving an average noise quota count of 1.0 by 2020. 2018 saw the entry of three new aircraft types to the IAG fleet; the Airbus A320neo, A321neo and A350. In addition, we received further deliveries of A330 and Boeing 787 aircraft. The new aircraft are up to 20% more fuel efficient than the aircraft they replace and up to 50% quieter bringing benefit to communities close to the airports we serve. 2018 also marked the end of an era for some of IAG’s fleet as eight of British Airways’ last Boeing 767s and one Boeing 747 aircraft were retired. British Airways remaining 747 aircraft will be fully phased out by 2024. In the meantime, efficiency projects are in progress, including engine upgrades and weight savings to get the best operational performance from these aircraft while they remain in the fleet. Fleet modernisation will continue in coming years with further deliveries of 92 A320neo series aircraft, 41 A350s and 12 Boeing 787s. These new aircraft will help our airlines to continue to improve passenger experience while minimising both climate and noise impacts.

66 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report

Carbon fund Noise

Customer donations to the British Airway’s Carbon Fund Minimising the noise impact of our aircraft operations on have helped us to support many community projects quality of life for communities around the airports where around the world focussed on renewable energy, energy we operate remains an important focus of our efficiency, and carbon reduction. The fund supported 12 sustainability programme. While we are proud of the projects in 2018, investing in solar panels, high efficiency progress that has been made in reducing aircraft noise

lighting, insulation and energy storage in schools, over time, we recognise, and are committed to Corporate Governance community and sports centres in the UK and in Africa. addressing, the ongoing concerns of communities This brings the total number of projects funded to date regarding aircraft noise. to 39, providing benefits to over 200,000 people. As well as our investment in new aircraft we have also The second phase of a project with the Ol Pejeta been modifying existing aircraft to help reduce noise Conservancy was completed with a £70,000 grant from impact. For example in 2018 Aer Lingus fitted 28 of their the Carbon Fund enabling the replacement of two diesel 37 Airbus A320/21 aircraft with airflow deflectors which powered borehole pumps with solar pumps. These help prevent the generation of a whistling sound during provide clean water as well as improving air quality and a phase of descent. In addition, all our airlines monitor providing free Wi-Fi for schoolchildren within 15km of operational noise performance to ensure flights are the pumps. operated sensitively and to identify improvements where possible.

Closer to home, a British Airways Carbon Fund grant Financial Statements supported the conversion of a derelict building on the We continued to engage with stakeholders including grounds of a primary school in Renfrewshire, Scotland to community groups, regulators and industry partners at a low carbon community hub. our hub airports to share operational insights and participate in research and operational trials. For example, British Airways participates in the Heathrow Community Noise Forum and worked with the group in 2018 to improve adherence to departure routings that Fuel efficiency are designed to minimise noise from the airport as well as a trial testing the impact of climb gradients on noise. In 2018 our Honeywell GoDirect Fuel efficiency software British Airways also contributed to a UK Government went live in Iberia, British Airways and Aer Lingus in study on departure noise mitigation, which found that Additional Information November 2018 with Vueling and the Group Portal due the two main departure procedures used by airlines to follow in first quarter 2019. This new tool will help distribute community noise in slightly different ways, but identify further fuel efficiency opportunities and enable that overall the total noise exposure is similar. group-wide benchmarking and reporting on aircraft fuel efficiency performance. In 2018 we also worked with UK Sustainable Aviation (SA) partners including other airlines, airport operators, Vueling and Iberia began working under the Eurocontrol aircraft manufacturers and the UK air traffic control Collaborative Environmental Management framework authority NATS to review our joint action on noise. SA with the Spanish air traffic control authority AENA to reports have demonstrated the industry has made good collectively develop more sustainable Spanish airspace progress in reducing its noise footprint in recent years targeting noise and CO2 emissions reductions. while future programmes in SA will focus on supporting Other examples of the fuel efficiency initiatives delivered further operational improvements and better by our airlines in 2018 include; landing lights retraction, understanding the non-acoustic quality of life options single engine taxi without APU, Boeing Winds, departure for managing the impacts of aircraft noise. altitude release, weight reduction and optimised engine wash programmes. Collectively these saved over 65,000 tonnes of CO2. We also began an innovative collaboration with Signol, behavioural economics experts, as part of IAG’s start-up accelerator programme Hangar 51.

www.iairgroup.com 67 SUSTAINABILITY CONTINUED

Inspire work experience Waste programme

Our airlines are working with suppliers to reduce British Airways award-winning Inspire work experience unnecessary waste and where possible avoid the use of programme allows young people to experience the single use plastics. For example, Vueling removed plastic excitement of the aviation industry. In 2018 over 24,000 tea cups from their shorthaul catering services, replacing young people were engaged through staff volunteering them with biodegradable alternatives. opportunities. 600 students were also hosted on work Iberia have also made changes to their service on board experience weeks across 25 departments and British aircraft and in their Dalí Premium Lounge in Madrid Airways was re-awarded the work experience Gold Airport including: Standard. Teacher Take Off Days also gave teachers a one-day work experience course and Your Flying • replaced plastic wrap for Business class earphones Future campaign was launched to encourage young with paper saving 436,000 plastic bags per year (1.5 people from a variety of backgrounds to consider a tonnes less plastic waste) flying career. • canned drinks replaced with returnable glass, saving 1 million cans per year (23.5 tonnes less aluminium waste) • individual plastic salad pots replaced with buffet salads, saving almost 200,000 containers (6 tonnes Air quality less plastic waste) • wines in plastic bottles replaced with glass which is Ground Service Equipment across the Group’s main recycled, saving 25,000 plastic bottles (575 kg less hubs of operation is being replaced where possible with plastic waste). electric vehicles, helping reduce our carbon footprint In 2018 Iberia’s work on the EU LIFE+ Zero Cabin Waste and improve air quality for local residents. 38% of Iberia project also progressed with the design of a new Airport Services vehicles are now electric, up from 29% on-board waste trolley to facilitate separation of waste last year. for cabin crew and a series of trial flights between Aer Lingus purchased 61 electric baggage tractors, belt Madrid and Barcelona, London and Geneva to test the loaders, passenger stairs and pushback tugs. Electric new product. Initial data shows an average of an vehicles currently comprise 38% of Aer Lingus Ground additional 13kg waste per flight being diverted from Service Equipment fleet. disposal to recycling. Mototok, the electric remote-control pushback tug British Airways appointed over 120 cabin crew as ‘War commercialised by British Airways is in use across all on Waste champions’ to help tackle waste. Successes shorthaul operations at Heathrow Terminal 5. In addition from their first few months in action included: to improving punctuality performance, the new tugs are • reduced the use of plastic swizzle sticks for drinks powered by Heathrow’s 100% renewable electricity

by 30 per cent supply saving 7,400 tonnes of CO2 and 28 tonnes of • changed the packing of Club Kitchen products saving NOx every year compared to the previous diesel- over 100,000 products a year from disposal powered tugs. British Airways continues to work with • collecting bottle corks, now sending c. 10kg of corks Mototok, collaborating on development of a model for each month to Re-Corked UK for recycling widebody aircraft. • adding waste reduction and recycling training to the Cabin Crew New Entrant Training course. IAG and British Airways are also tackling waste at our London headquarters. In April we introduced a levy on disposable coffee cups, plastic stirrers were removed, plastic take away containers and cutlery in the canteen was replaced with reusable alternatives and plastic water cups were removed from water dispensers. In total, over 1 million individual single-use plastic items were saved in the first 8 months from launch.

68 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report

Health and safety Workforce diversity

Health and safety is fundamental to our business, The progression of women into leadership roles is whether in the air or on the ground. It is our highest vitally important and we have set a target to reach 33% priority. We are committed to operating in a healthy, women across our senior executive levels (top 200) safe and secure way in compliance with all applicable by 2025. We will monitor and report on our progress, laws, regulations, company policies and industry including the management pipeline across the Group.

standards. This commitment applies equally to our We have put in place an extensive programme of Corporate Governance employees, customers and all others affected by action to help deliver this, some of these achievements our activities. in 2018 included: We have robust governance in place led by the safety • A series of roadshows across the Group to engage committees in each of our operating companies. The leadership teams and raise awareness. IAG Safety Committee, chaired by the Group CEO, • A diagnostic questionnaire for approximately 2000 monitors all matters relating to the operational safety of managers across the Group in June, which identified IAG’s airlines as well as to the systems and resources their experiences around gender inclusion. Key actions dedicated to safety activities across the Group. are being developed in the individual Operating Our customers travel on aircraft and through buildings Company diversity plans. and environments that are subject to regulations • British Airway & Avios reported their Gender Pay Gap

applicable to health and safety in each country. figures in April. Financial Statements Procedures, systems and technology used in our • International Women’s Day was marked with British operations are designed to protect employees and Airways and Aer Lingus flights crewed and operated customers alike. by women colleagues in March. • IAG partnered with Rocking Ur Teens, a social enterprise, hosting a teen STEM conference in November for 250 school girls aged 13 to 15. This was to help motivate and inspire the next generation of Beyond accessibility young women into the airline industry. • Established mentoring and sponsorship programmes British Airways has committed to ensuring that the across the Group for senior managers. journey process is made simpler and easier for Additional Information customers with disabilities. An internal communication campaign and a video featuring British Airways customers, called Beyond Accessibility, has been incorporated into colleague learning to help them to understand the challenges that customers with disabilities can face when they travel. They are also working with airport operators and handling agents to provide more consistent customer service including prioritisation during disruption, dedicated check in areas and more effective priority boarding. In addition, British Airways has partnered with the National Autistic Society to understand what can be done to help and support customers who have hidden and non-visible disabilities too. Across the Group we comply with relevant legislation regarding accessibility for disabled employees and customers in our buildings and our operations.

www.iairgroup.com 69 SUSTAINABILITY CONTINUED

Supply chain Modern slavery

IAG’s Supplier Code of Conduct is the main framework Human Trafficking is of real concern in the airline setting out the standards to which suppliers engaging industry and it is a topic we have focused on more with IAG and its operating companies must comply. The acutely since 2015 with the reform of the Spanish Supplier Code of Conduct covers Labour, Health and Criminal Code and the introduction of the UK Modern Safety, Environment and Business Integrity standards. Slavery Act. In 2018, IAG established a more robust risk management Transporting over 100 million passengers per year and process to facilitate due diligence and monitoring of our with tens of thousands of suppliers, Group Slavery and suppliers throughout the supplier lifecycle. IAG Global Human Trafficking is relevant for IAG. We have no Business Services (GBS) has enlisted Bureau van Dijk, known cases of human rights violations within our a major business intelligence provider, to enrich organisation and we are increasing our screening of our understanding of our suppliers’ legal, social, suppliers to ensure that this is also the case in their environmental and financial compliance. To date, organisations. We work closely with governments and 5,500 suppliers have been screened during the first the airports in which we operate to ensure that any phase of deployment. suspected trafficking on our flights are reported and dealt with appropriately. We train our staff to recognise We monitor suppliers by the number of risks as well as the signs of potential human trafficking situations and the severity of each risk type. IAG reserves the right to provide procedures for reporting where any cases conduct on-site audits, issue reviews and corrective are suspected. action plans, and terminate contracts in serious instances. IAG aims to work collaboratively with poorly In June 2018 we published our second Group Slavery performing suppliers to improve their standards. Audits and Human Trafficking Statement as set out under the are carried out by trusted third-party auditors with track UK Modern Slavery Act 2015. Modern Slavery clauses records in driving improvements in responsible business now feature in all new supplier contracts as well as those practices in global supply chains. coming up for renewal. IAG representatives attended an IATA seminar on Modern Slavery to share knowledge, In 2019, we will continue to screen suppliers during initial learnings and best practice. The seminar culminated in a set-up and on a quarterly basis to grow the number of resolution denouncing human trafficking and reaffirms suppliers covered. Results will be reviewed with commitments to tackling human trafficking including appropriate risk owners on an ongoing basis. sharing of best practices, staff training and reporting. This resolution was passed by IATA at its 2018 Annual General Meeting. Aer Lingus has had human trafficking training for pilots Community giving and cabin crew since 2016 and run recurrent human trafficking training on a 3-year basis. Guidance and Aer Lingus celebrated the 21st anniversary of its procedures for flight crew and cabin crew is also partnership with UNICEF’s Change for Good appeal, included in their Operations Manual. British Airways is raising $1 million through on-board customer donations. also ensuring all cabin crew are trained to recognise the Aer Lingus also continued its support of Special signs of human trafficking with an awareness training Olympics Ireland collecting over €8,000 and session now included in annual mandatory training. donating flights. British Airways’ charity partnership with Comic Relief, Flying Start reached a major milestone in 2018, hitting its 2020 target of raising £20 million two years early. Following a tsunami in Indonesia in September, British Airways customers raised £188,576 for the Disasters Emergency Committee appeal. A joint event with Aerobility saw 99 wheelchair users pull a Boeing 787-9 aircraft 100 metres, raising £16,000 and achieving a Guinness World Record. Iberia’s partnership with Amadeus to support UNICEF’s immunisation programme has been extended to 2020. Since 2013, the collaboration has raised €935,000 and has resulted in the vaccination of over 1 million children in Chad, Angola and Cuba. Vueling’s collaboration with Save the Children generated €235,000 in customer donations in 2018. Vueling donated 120 tickets to the Make-A-Wish foundation, helping children with serious illnesses to have life- changing experiences. Vueling has also teamed up with Nutrition Without Borders, donating unused bottles of water from flights in an initiative which also reduces on-board waste.

70 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Ethics and integrity Anti-bribery and corruption policy and programme IAG and its operating companies have policies in IAG and its operating companies do not tolerate any place setting out the general guidelines that govern form of bribery or corruption. This is made clear in our the conduct of directors and employees of the Group company policies which are available to all directors and when carrying out their duties in their business and employees. Each Group operating company has a professional relationships. All directors and employees Compliance Department responsible for managing the are expected to act with integrity and in accordance anti-bribery programme in their business. These with the laws of the countries they operate in. IAG also compliance teams meet regularly through Working

maintains a Supplier Code of Conduct which outlines the Groups and Steering Groups and annually they conduct Corporate Governance standards of behaviour we expect from our suppliers. In a review of bribery risks across the Group. The main 2019, IAG will be implementing a new Group-wide Code risks identified during the 2018 review relate to the use of Conduct that will apply to all directors, managers and of third parties, operational and commercial decisions employees of IAG, as well as its third parties. involving government agencies, and the inappropriate use of gifts and hospitality. Various training and communications activities are carried out for directors, employees and third parties to Anti-bribery training courses include e-learning and support awareness of the principles that govern the classroom sessions. Individual training requirements are conduct of the Group and its employees. A new set by each operating company and are determined by e-learning to support the new Code of Conduct will be factors such as the level and responsibilities of an rolled out in 2019 and this will be applicable to all Group employee. An updated e-learning course is being rolled employees and directors. out in 2019 across the Group. Financial Statements Resources are available across the Group for The programme’s risk-based third-party due diligence employees to get advice or to report grievances or any includes screenings, external reports, interviews and site alleged or actual wrongdoing. There are whistle-blowing visits depending on the level of risk that a particular channels provided by Safecall and Ethicspoint available third-party presents. In 2018 the Group implemented throughout the Group, where concerns can be raised integrity-based screenings into its new Group-wide on a confidential basis. The IAG Audit and Compliance vendor management system and in 2019 a new third- Committee reviews the effectiveness of whistle- party management tool for higher risk third parties will blowing channels on an annual basis. This annual be implemented, together with updated procedures. review considers the volume of reports by category; The Audit and Compliance Committee of the IAG Board timeliness of follow-up; responsibility for follow-up; receives an annual update on the programme. and, any issues raised of significance to the financial Additional Information statements. The annual review is coordinated by the Head of Group Audit. In 2018 a total of 201 reports were received through the confidential reporting channels. Anti-money Laundering This is compared to 205 reports received in 2017. All reports were followed up and investigated where IAG has various processes and procedures in place appropriate and reported to the Audit and across the Group, such as supplier vetting and Compliance Committee. management, Know Your Counterparty procedures and a Group Finance Instruction which help to combat money laundering in the business.

www.iairgroup.com 71 CHAIRMAN’S INTRODUCTION TO CORPORATE GOVERNANCE Maintaining the very highest standards of Corporate Governance

“Continuing to adapt to new and demanding standards of corporate governance will sustain our long-term performance and remains a commitment of the Board.”

Antonio Vázquez Chairman

On behalf of the Board, I am very Adapting to new standards Solid foundations pleased to introduce the report on As a company listed in both Madrid and The UK Code demands that we take Corporate Governance for 2018, a year London, we have to meet two very proper account of the views of all our of continued strong performance for the demanding governance codes. That can stakeholders – investors, our Group in an unsettled political and be challenging, but it’s a challenge we communities, regulators, environmental economic environment. have always welcomed. campaigners, our suppliers and our employees. This is something we want A number of key internal and external Against this backdrop, the introduction to get right, rather than take an challenges shaped the Board’s of the new UK Corporate Governance approach that is too generic or discussions in 2018. These included Code in July 2018 was and remains an simplistic. It will require some deep Brexit, risk management, the malicious obvious focus for the Board. We fully thought and will be a major priority for theft of data at British Airways, oil price embrace the new code and I personally the Board in 2019. volatility and political uncertainty in very much agree with its guiding some of our key markets. We also principle – that companies do not live in Fortunately, we start from a strong base continued to scrutinise the overall isolation, but are deeply connected to in this important work. Group strategy and the development of the wider world in which they operate. our brands and our offer to customers. For instance, at our January meeting the It was, by any standards, a busy agenda. Society is demanding more and more of Board approved a new code of conduct its companies, and that’s as it should be. for the Group following in-depth Throughout our eight-year history we We are committed to making sure that discussions with the management team. have always aimed to achieve the very IAG meets those demands, even though, It is designed to set out in an easy-to- highest standards of governance and, as a young parent company overseeing understand way the ethical standards as a Board, that remains our a portfolio of well-established and that have been part of our overall firm commitment. independent airlines and brands, the approach for some while. It recognises We want to continue developing an task of meeting some of the Code’s that IAG is made up of diverse approach that will allow us to support objectives will be more difficult for us businesses, people and cultures and that and challenge the IAG management than other organisations with a more this rich diversity is fundamental to what team as they steer the future straightforward structure. On the plus we are as a Group. Equally, it makes development of the Group and all its side, our relative youth means we clear our commitment to acting with operating airlines. Corporate have flexibility and can continue to integrity at all times. governance in that sense is vital in be innovative. sustaining the success of IAG, irrespective of the market conditions that confront us in any one year.

72 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

The Board will play an active role in We will keep all these engagement Marc Bolland, already an experienced embedding these common standards of programmes under close review in the member of the Committee, has conduct, setting the right tone for the current year, making sure that the right succeeded Dame Marjorie in the role. business from the top and supporting information is reported to the Board and Continuing to refresh the Board the management team as it launches the that stakeholders are receiving clear and code in the coming months. In addition, useful feedback. As announced in May 2018, Jim we will be seeing what more we can do Lawrence stepped down from the The Board will also look closely at how Board at our Shareholders’ Meeting in as a Board to oversee, shape and we communicate with our employees. monitor our corporate culture. June having made a significant We want to strengthen our approach contribution to the Board and its Audit Financial Statements It’s important to be clear that our here but in a way that takes account of and Compliance Committee. I would like stakeholder relationships are at different the diversity of nationalities and cultures to thank him for his dedicated work. levels of maturity in different parts of within the Group that we are so happy the business. But, again, I believe we can and proud to embrace. On June 14, 2018 we were delighted to build on solid foundations here. We do welcome Deborah Kerr as a new Board effectiveness already have strong engagement with non-executive director and as a member our main stakeholders, starting with our We continue to evaluate the of the Audit and Compliance shareholders as you can read on pages effectiveness of the Board. Each year Committee. We are very pleased to 83 and 84 of this report. The same is we carry out an internal review, opening have her skills and business experience, true with our customers, with our ourselves up to external review in the not least her deep knowledge of regulators and with different third year to make sure our own technology, at our disposal. Additional Information industry bodies. assessments are robust. The process of selecting new Board We are particularly proud of our The internal review gives me the members is rigorous, as the report from investor relations programme and I was opportunity to talk to each of my fellow our Nominations Committee on page 92 delighted once again this year to meet directors, individually, to hear how we demonstrates. We can only provide with many of our major shareholders to can improve our approach, to check useful and value-enhancing oversight of talk about governance, strategy, our that we are focusing on the right issues the Company if we attract directors with succession plans and the business and, above all, to make sure that the the depth and breadth of experience to challenges we face. Our Senior work we do as directors is adding real really understand the complexities of Independent Director and the Chairman value to the Group, for the benefit of our running a business like IAG. of the Remuneration Committee also shareholders. In my opinion we have a superb group met key investors to discuss specific You can read more about the latest of people on our Board from a broad issues. Such meetings are very valuable evaluation on pages 91 and 93. range of professional backgrounds to us and, I know, are greatly welcomed offering a rich and diverse array of skills Remuneration by investors. and perspectives. The work they do to Following detailed engagement with ensure the continued success of IAG is The regulatory agenda for IAG as a principal investors to test our ideas, we whole and each of our operating extremely important. I thank them all for presented an updated remuneration the tremendous contribution they make. businesses is intense, requiring constant policy to shareholders at the 2018 attention and dialogue. Communication Shareholders’ Meeting. I’m glad to say Antonio Vázquez Chairman channels with customers and suppliers the new policy received solid backing are well developed and, through our from our shareholders. sustainability programme, we have a clear understanding of what matters This work was led, with great skill, by most to stakeholders thanks to a Dame Marjorie Scardino. She decided to materiality exercise we conducted step down as chair of the Remuneration in 2017. Committee in February, after three years in that post. On behalf of the Board, I would like to thank her for all her excellent work.

www.iairgroup.com 73 BOARD OF DIRECTORS

N S S A N 1 Antonio Vázquez 2 Willie Walsh 3 Patrick Cescau Chairman Chief Executive Officer Senior Independent Director Key areas of experience: Key areas of experience: Key areas of experience: Consumer, sales/marketing, Airline industry Consumer, finance, sales/ finance, governance Other Group appointments: marketing, governance Current external appointments: Chairman, Aer Lingus Board of Directors. Current external appointments: Member, Advisory Board of the Franklin Current external appointments: Chairman, InterContinental Hotel Group. Institute. Member, Cooperation Board of Chairman, Airlines for Europe (A4E) Trustee, LeverHulme Trust. Member, Temasek Loyola University. Trustee, Nantik Lum European Advisory Panel. Patron, St Jude India Previous relevant experience: Foundation. Chairman, National Treasury Management Children’s Charity. Previous relevant experience: Agency of Ireland, 2013-2018. Chairman, IATA Previous relevant experience: Chairman, Iberia 2012-2013. Chairman and Board of Governors 2016-2017. Chief Executive Senior Independent and Director, Tesco CEO, Iberia 2009-2011. Chairman and CEO, Officer, British Airways 2005-2011. Chief 2009-2015. Director, INSEAD 2009-2013. Altadis Group 2005-2008. Chairman, Logista Executive Officer, Aer Lingus 2001-2005. Chief Senior Independent Director, Pearson 2005-2008. Director, Iberia 2005-2007. Chief Operating Officer, Aer Lingus 2000-2001. 2002-2012. Group Chief Executive, Unilever Operating Officer and other various positions, Chief Executive Officer, Futura (Aer Lingus’ 2005-2008. Chairman, Unilever UK. Deputy Cigar Division of Altadis Group 1993-2005. Spanish Charter airline) 1998-2000. Joined Aer Chairman, Unilever The Netherlands, Food Various positions at Osborne 1978-1983 Lingus as cadet pilot in 1979. Director. Prior to being appointed to the Board and Domecq 1983-1993. Began his of Unilever in 1999 as Group Finance Director, professional career in consultancy at he was Chairman of a number of the Arthur Andersen & Co. company’s major operating companies and divisions including the USA.

R S A R 4 Marc Bolland 5 Enrique Dupuy de Lôme 6 María Fernanda Mejía Non-Executive Director Chief Financial Officer Non-Executive Director Key areas of experience: Key areas of experience: Key areas of experience: General management, commercial Finance, airline industry General management, marketing and management/marketing, retail, Other Group appointments: sales, supply chain, strategic planning, hospitality industry Director, AERL Holding Limited corporate transactions Current external appointments: Current external appointments: Current external appointments: Head of European Porftolio Operations, The Chairman, Iberia Cards. Non-Executive Senior Vice President, The Kellogg Company. Blackstone Group. Director, Coca-Cola Director, Grupo Lar. President, Kellogg Latin America. Corporate Company. Non-Executive Director, Exor S.p.A. Previous relevant experience: Officer and member of The Kellogg Company Vice President, UNICEF UK. CFO, Iberia 1990-2011. Head of finance and Executive Leadership Team. Board Member of Previous relevant experience: deputy director of financial resources, Instituto the Council of the Americas. Chief Executive, Marks & Spencer 2010-2016. Nacional de Industria (INI) and Teneo financial Previous relevant experience: Chief Executive, WM Morrison Supermarkets group 1985-1989. Head of subsidiaries Vice-President and General Manager PLC 2006-2010. Director, Manpower USA Enadimsa (INI Group) 1982-1985. Chairman, Global Personal Care and Corporate 2005-2015. Chief Operating Officer 2005- IATA finance committee 2003-2005. Fragrance Development, Colgate-Palmolive 2006, Director 2001-2005 and other executive 2010-2011. Vice-President Marketing and and non-executive positions, Heineken Innovation Europe/South Pacific Division, 1986-2001. Colgate-Palmolive 2005-2010. President and CEO Spain and Spain Holding Company 2003-2005, General Manager Hong Kong and Director, Greater China Management team 2002-2003, Marketing Director Venezuela 2000-2002, Marketing Director Ecuador 1998-2000.

Committee Chair S Safety Committee A Audit and Compliance Committee N Nominations Committee R Remuneration Committee

74 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report

A A S N 7 Deborah Kerr 8 Kieran Poynter 9 Emilio Saracho Corporate Governance Non-Executive Director Non-Executive Director Non-Executive Director Key areas of experience: Key areas of experience: Key areas of experience: Technology, digital, marketing, operations, Professional services, finance services, Corporate finance, investment banking, software and services, general management corporate governance, corporate transactions corporate transactions Current external appointments: Current external appointments: Current external appointments: Director, NetApp Inc. Director, Chico’s FAS. Chairman, BMO Asset Management (Holdings) Director, Altamar Capital Partners. Inc. Director, ExlService Holdings, Inc. PLC. Senior Independent Director, British Director, Inditex. Managing Director, Warburg Pincus. American Tobacco. Previous relevant experience: Previous relevant experience: Previous relevant experience: Chairman, Banco Popular Español 2017. Vice Executive Vice President, Chief Product and Chairman, Nomura International 2009-2015. Chairman and Member Investment Banking Technology Officer, SABRE Corporation Member, Advisory Committee for the Management Committee, JPMorgan 2015-

2013-2017. Director, DH Corporation 2013-2017. Chancellor of the Exchequer on the 2016. Deputy CEO 2012-2015, CEO Investment Financial Statements Director, Mitchell International, Inc. 2009-2013. competitiveness of the UK financial services Banking for EMEA 2012-2014 and member Executive Vice President, Chief Product and sector 2009-2010. Member, President’s Executive Committee 2009-2013, JP Morgan. Technology Officer, FICO, 2009-2012. Vice committee of the Confederation of British CEO, JP Morgan Private Banking for EMEA President and Chief Technology Officer, HP Industry 2000-2008. UK Chairman and Senior 2006-2012. Director, Cintra 2008. Director, Enterprise Services 2007-2009. Vice President Partner, PricewaterhouseCoopers 2000-2008. ONO 2008. Chairman, JP Morgan Spain & Business Technology Optimization, Hewlett- UK Managing Partner and other executive Portugal 1998-2006. Global Investment Packard Software 2005-2007. Senior Vice positions, PricewaterhouseCoopers 1982- Banking Head, Santander Investment (UK) President Product Delivery, Peregrine Systems 2000. 1995-1998. Spanish Market Manager, 1998-2005. Prior senior leadership roles with Goldman Sachs International 1990-1995. NASA’s Jet Propulsion Laboratory, including Mission Operations Manager, US Space VLBI,

Nasa Jet Propulsion Laboratory 1988-1998. Additional Information

R N S R A R 10 Dame Marjorie Scardino 11 Nicola Shaw 12 Alberto Terol Non-Executive Director Non-Executive Director Non-Executive Director Key areas of experience: Key areas of experience: Key areas of experience: Commercial management, government Transport sector, public policy and regulatory Finance, professional services, information affairs, communications, digital and media, affairs, consumer, general management technology, hospitality industry legal services Current external appointments: Current external appointments: Current external appointments: Executive Director, National Grid plc. Member Vice Chairman, Leading Independent Director Senior Independent Director, Twitter, Senior of the Audit and Risk Committee, English and Chairman of the Appointments, Independent Director, Pure Tech Health Inc. Heritage. Director for Major Projects Remuneration and Corporate Governance Member, charitable boards including The Association. Committee, Indra Sistemas. Chairman of the MacArthur Foundation (Chairman), London Previous relevant experience: Supervisory Board, Senvion GmbH. Chairman School of Hygiene and Tropical Medicine Non-Executive Director, Ellevio AB 2015-2017. of the Audit Committee, Senvion S.A. Director, (Chairman), and The Carter Center. Member, CEO, HS1 Ltd 2011-2016. Member of the Broseta Abogados. International Senior Board of the Royal College of Art. Member of Department for Transport’s Rail Franchising Advisor, Centerbridge. Independent Director, the Visiting Committee for the MIT Media Lab. Advisory Panel 2013-2016. Non-Executive Schindler España. Patron of Fundación Member, Board of Bridge International Director, Aer Lingus Plc 2010-2015. Charity Telefonica. Executive Chairman of various Academies (HQ – Kenya). Trustee, Transaid 2011-2013. Director and family owned companies. Previous relevant experience: previously Managing Director, Bus Division at Previous relevant experience: Chief Executive Officer, Pearson 1997-2012. FirstGroup plc 2005-2010. Director of Director, OHL 2010-2016. Director, Aktua Chief Executive Officer, The Economist Group Operations and other management positions 2013-2016. Director, N+1 2014-2015. from 1993-1996. President, The Economist at the Strategic Rail Authority 2002-2005. International Senior Advisor, BNP Paribas Group US 1985-1993. Lawyer practising in Deputy Director and Deputy Chief Economist, 2011-2014. Member, Global Executive the US 1975-1985. Office of the Rail Regulator (ORR) 1999-2002. Committee Deloitte 2007-2009. Managing Associate, Halcrow Fox 1997-1999. Transport Partner: EMEA Deloitte 2007-2009, Managing specialist, The World Bank 1995-1997. Partner Global Tax & Legal Deloitte 2007- Corporate planner, London Transport 2009. Member, Global Management 1990-1993. Committee Deloitte 2003-2007. Managing Partner: Latin America Deloitte 2003-2007, Integration Andersen Deloitte 2002–2003, Europe Arthur Andersen 2001-2002, Global Tax & Legal Arthur Andersen 1997-2001, Garrigues-Andersen 1997-2000.

www.iairgroup.com 75 CORPORATE GOVERNANCE

IAG as a Group IAG is responsible for the Group’s strategy and business plan. It centralises the Group’s corporate functions, including the development of its global platform.

Board* Comprises ten non-executive directors and two executive directors (IAG CEO and CFO) and is responsible for: • the supervision of the management of the Company • approval of any significant contractual commitment, asset acquisition or • the approval of the strategy and general policies of the Company and disposal or equity investment or divestment the Group • the definition of the Group structure • the determination of the policy on shareholders’ remuneration • the approval of major alliances • ensuring the effectiveness of the Company’s corporate • the definition of the shareholders disclosure policy governance system • approval of the risk management and control policy, including the Group’s risk appetite

Chairman CEO Senior Independent Director Antonio Vázquez Willie Walsh Patrick Cescau • chairs the shareholders’ meetings • is responsible and accountable to the • provides a sounding board for the • leads the Board’s work Board for the management and profitable Chairman operation of the Company • sets the Board’s agenda and directs its • serves as intermediary for the other discussions and deliberations • leads the Company’s management team directors when necessary • ensures that directors receive accurate, • oversees the preparation of operational • is available to shareholders, should they timely and clear information, including and commercial plans have any concerns they cannot resolve the Company’s performance, its strategy, • develops an effective management through the normal channels challenges and opportunities strategy • leads the evaluation of the Chairman’s • ensures that there is an effective • puts in place effective controls performance annually communication with shareholders and that • coordinates the activities of the Group directors and executives understand and address the concerns of investors • offers support and advice to the Chief Executive • promotes the highest standards of corporate governance

Audit and Compliance Nominations Committee Remuneration Committee Safety Committee Committee • evaluates and makes • reviews and recommends • receives material safety • reviews the activity and recommendations regarding to the Board the directors information about any performance of the external the Board and committee and senior executive subsidiary or franchise, auditor, preserving their composition remuneration policy codeshare or wet independence • submits to the Board the • reports to the Board lease provider • supervises the effectiveness proposed appointment of on incentive plans and • exercises a high level of the internal control independent directors pension arrangements overview of the safety activities of the Company, the • puts in place plans for the • monitors compliance with the and resources internal audit and the risk succession of directors, Company’s remuneration policy • follows up on any safety related management systems for the Chairman and the • ensures compliance with measures as determined by • supervises the process for Chief Executive disclosure requirements the Board the preparation of the Group’s • oversees and establishes regarding directors’ financial results, reviewing the guidelines relating to the remuneration matters Company’s accounts and the appointment, recruitment, correct application of the career, promotion and dismissal accounting principles of senior executives • assesses and oversees the • reports on the proposed Company’s compliance system appointment of senior • reviews the Company’s CSR executives and sustainability policy • monitors compliance with the company’s director selection and diversity policy

* List of Board’s reserved matters can be found in Article 3 of the Board Regulations, available on the Company’s website.

76 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 The Group operating companies Strategic Report Each operating company is responsible for the management of their respective businesses and accountable for the implementation of the joint business and synergy plan. Each company has its own board of directors and its own executive committee, led by the top executive of each company. Corporate Governance

Enrique Dupuy de Lôme Group Chief Financial Officer

Stephen Kavanagh1 Chief Executive Officer Financial Statements

Robert Boyle Director of Strategy

Alex Cruz Chairman and CEO Additional Information

Luis Gallego Chairman and CEO IAG Management Committee Headed by the Group CEO:

• day-to-day management of the Javier Sanchez Prieto Group Chairman and CEO • capturing cost and revenue synergies • development of Group long- term strategy Julia Simpson Chief of Staff

Chris Haynes General Counsel

Steve Gunning Director of Global Services IAG GBS British Airways Chief Financial Officer

Lynne Embleton Chief Executive Officer

Andrew Crawley Chief Executive Officer

1 On January 1, 2019 Sean Doyle was appointed as Chief Executive Officer of Aer Lingus. Stephen Kavanagh will continue as non-executive director on the Board of Aer Lingus. www.iairgroup.com 77 CORPORATE GOVERNANCE CONTINUED

Application of governance codes accompanied by a duly completed form service contract. It was thought As a company incorporated and listed which is required by the CNMV covering necessary to continue the Iberia benefits in Spain, IAG is subject to applicable some relevant data. in order to retain this key director and, as such, complying with the UK Spanish legislation and to the Spanish In 2018, IAG complied with all the Corporate Governance Code’s principle corporate governance framework. recommendations of the Spanish of only offering a remuneration package According to Spanish legal Corporate Governance Code, with the sufficient to retain this director. Details requirements, this Corporate sole exception of the rules on the can be found in the Directors’ Governance Report report includes composition and operation of non Remuneration report. information regarding compliance with mandatory Board committees, which is the Spanish Good Governance Code of partially non complied with as far as The Board believes that, notwithstanding Listed Companies as well as other IAG's Safety Committee is chaired by an the above exceptions, the company has information related to IAG's corporate executive director, the Group Chief a robust governance structure. governance. This report is part of the Executive, and not by an independent Governance framework: structure and IAG Management Report. director as recommended by the Code. responsibilities The Board believes this is appropriate, At the same time, as IAG has a listing IAG, as the Group’s parent company, is on the London Stock Exchange, it taking into consideration that IAG is not an airline but the Group parent responsible for the Group’s strategy and is also subject to the UK Listing Rules, business plan. It centralises the Group’s including the requirement to explain company, and its Safety Committee exercises a high-level supervisory role corporate functions, including the whether it complies with the UK development of its global platform. Corporate Governance Code published within the Group. Consistent with legal by the UK Financial Reporting Council requirements, responsibility for safety Each operating company is responsible (“FRC”) as amended from time to time. matters remains with each Group airline, for the management of their respective A copy of the version of the and the technical nature of the safety businesses and accountable for the UK Corporate Governance Code issues and the fact that each Group implementation of the joint business and applicable to this reporting period airline has its own particular synergy plans. Each company has its (updated and published in April 2016) characteristics makes it advisible that own board of directors and its own is available at the website of the FRC the Group's top executive leads this executive committee, led by the top (www.frc.org.uk). This Corporate committee and coordinates the executive of each company. reporting of the different airlines. Governance Report includes an There is a clear separation of the roles of explanation regarding the Company’s As far as the 2016 UK Corporate the Chairman and the Chief Executive. application of the main principles of the Governance Code is concerned, the The Chairman is responsible for the UK Corporate Governance Code. Company considers that during the year operation of the Board and is In accordance with the new Spanish it has complied with all its provisions but responsible for its overall effectiveness Comisión del Mercado de Valores for the following matter: the service in directing the company. contract for Antonio Vázquez does not (CNMV) regulation, IAG presents this The Chief Executive is responsible for comply with the recommendation that year a consolidated Corporate the day-to-day management and notice periods should be set at one year Governance Report responding to performance of the Group and for the or less so as to limit any payment on Spanish and UK reporting requirements. implementation of the strategy exit. The terms of Antonio Vázquez’s approved by the Board. All of the This consolidated Corporate service contract as Executive Chairman powers of the Board have been Governance Report is available of Iberia were considered at the time of permanently delegated to the IAG on the Company’s website the merger between British Airways and Chief Executive save for those which (www.iairgroup.com), and it is also Iberia, and it was determined that an cannot be delegated pursuant to the available on the CNMV website entitlement to lump-sum retirement Bylaws, the Board Regulations or the (www.cnmv.es), this consolidated benefits in excess of one year’s salary applicable legislation. Corporate Governance Report is should be carried over into his IAG

Board composition As set out in the Company’s Bylaws the Board shall comprise a minimum of nine and a maximum of 14 members. As of December 31, 2018 the Board composition was: Name of Board Member Position/Category First appointed Antonio Vázquez Chairman May 25, 2010 Willie Walsh Chief Executive Officer May 25, 2010 Patrick Cescau Senior Independent Director September 27, 2010 Marc Bolland Director (independent) June 16, 2016 Enrique Dupuy de Lôme Chief Financial Officer September 26, 2013 Deborah Kerr Director (independent) June 14, 2018 María Fernanda Mejía Director (independent) February 27, 2014 Nicola Shaw Director (independent) January 1, 20181 Kieran Poynter Director (independent) September 27, 2010 Emilio Saracho Director (independent) June 16, 2016 Dame Marjorie Scardino Director (independent) December 19, 2013 Alberto Terol Director (independent) June 20, 2013

1 The appointment of Nicola Shaw as a non executive director was approved by the Shareholders’ Meeting on 15 June 2017.

78 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 The IAG Board currently comprises ten non-executive directors and two Board diversity Strategic Report executive directors, IAG’s Chief Executive Officer and Chief Financial Officer. The biographies of each member of the Board are set out on Nationality pages 74 and 75. At the Annual Shareholders’ Meeting on 14 June 2018, Deborah Kerr was appointed as a non-executive director, Corporate Governance following the retirement of James Spain Ireland UK France US Colombia Netherlands Lawrence. Further details of Deborah Kerr’s appointment are set out in the Nominations Committee report on pages 91 to 93. Gender The Company is attentive to the need for progressive refreshing of the Board and committee membership. The IAG Board continues to have a strong mix of highly qualified individuals, from a wide range of backgrounds, countries and industries, with appropriate 33% 67% Financial Statements experience of complex organisations 4 females 8 males with global reach. For further details see the Nominations Committee report on pages 91 to 93. The Board Secretary is Álvaro López- Jorrín, partner of the Spanish law firm Tenure J&A Garrigues, S.L.P, and the Deputy Secretary is Lucila Rodríguez. Appointment, re-election and Additional Information resignation of directors 33% 33% 0–3 years 4–6 years The selection and appointment process is described in detail in the Nominations Committee report on pages 92 and 93. IAG directors are appointed for a period of one year, as set out in the Company's Bylaws. At the end of their mandate, 33% directors may be re-elected one or more 7–9 years times for periods of equal duration to that established in the Bylaws. In this Core areas of expertise way, the Company complies with the UK Code recommendation that directors should be subject to annual re-election. Re-election proposals are subject to a 41.6% 83.3% formal process, based on the Industry General Nominations Committee proposal in the management case of non executive directors, or its recommendation report for executive directors. This proposal or report is prepared having due regard to the 41.6% 41.6% performance, commitment, capacity, Consumer Corporate ability and availability of the director to Brands transactions continue to contribute to the Board B2C with the knowledge, skills and experience required. Directors cease to hold office when the 58.3% 50% term of office for which they were Current/recent International appointed expires. CEO/Chair experience Notwithstanding the above, a director must resign in the cases established in article 16.2 of the Board Regulations, a copy of which is available on the 25% 8.3% Accounting/ Technology Company's website (www.iairgroup.com), Audit and the Spanish Comisión Nacional del Mercado de Valores website (wwww.cnmv.es).

www.iairgroup.com 79 CORPORATE GOVERNANCE CONTINUED

Under article 23.2 of the Board Regulations, directors have a number of disclosure obligations, including the duty to inform the Company of circumstances that might harm the Group's name or reputation. In particular, if they become subject to any judicial, administrative or other proceedings. In such case, the Board would consider the case as soon as practicable and adopt the decisions it deems fit, taking into account the corporate interest. If remaining on the Board would affect the Company’s reputation, or otherwise jeopardise its interest, a director must place their position at the disposal of the Board of Directors and, at its request, formally resign. A director who stands down before the end of their term of office must state his or her reasons in a letter to be sent to all the directors. In addition, these explanations need to be included in the Company’s Annual Corporate Governance Report. The Board of Directors may only propose the removal of a non executive director before the end of the mandate when it considers there is just cause, following a report by the Nominations Committee. For these purposes, just cause is deemed to exist when the director takes up new positions or enters into new obligations that prevent him from dedicating the necessary time to the performance of his or her duties as a director, otherwise breaches his or her duties as a director or unexpectedly becomes subject to any of the circumstances provided for in article 16.2 of the Board Regulations. The removal may also be proposed as a result of takeover bids, mergers or other similar corporate transactions that determine a material change of control. Board and committee meetings The Board met 10 times during the reporting period. The Board also held its annual two-day strategy meeting in September 2018. During the reporting period, the Chairman and the non–executive directors met on two occasions without the executives present. As stated in the Board Regulations, directors shall make their best efforts to attend Board meetings. If this is not possible, they may grant a proxy to another director, although non executive directors may only grant their proxy to another non executive director. These proxies need to be in writing and specifically granted for each meeting. No director may hold more than three proxies, with the exception of the Chairman, who cannot represent more than half of the Board members. As far as possible, proxies should be granted including voting instructions. Meetings attended by each director of the Board and the different committees during the reporting period are shown in the table below: Audit and Compliance Nominations Remuneration Safety Director Board Committee Committee Committee Committee Total in the period 10 8 6 5 2 Antonio Vázquez 10 – 6 – 2 Willie Walsh1 9 – – – 2 Marc Bolland1 8 – – 4 2 Patrick Cescau 10 8 6 – – Enrique Dupuy de Lôme 10 – – – – Deborah Kerr2 3/4 3/4 – – – James Lawrence3 6/6 – – – – María Fernanda Mejía1 8 8 – 5 – Nicola Shaw4 9 – – 2/2 1 Kieran Poynter 10 8 – – 2 Emilio Saracho 10 – 6 – – Dame Marjorie Scardino 9 – 5 4 – Alberto Terol 10 8 – 5 –

1 Marc Bolland, María Fernanda Mejía and Willie Walsh could not attend the extraordinary Board meeting held on 24 April 2018 called at short notice by the Board Secretary at the request from the Chairman. 2 Deborah Kerr was appointed as a non executive director, and member of the Audit and Compliance Committee, on June 14, 2018. 3 James Lawrence retired from the Board on June 14, 2018. 4 Nicola Shaw was appointed as a member of the Remuneration Committee and of the Safety Committee on June 14, 2018.

80 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 The Board maintains a rolling 12-month agenda schedule for Board meetings that sets out regular operational matters as well as specific upcoming issues to be considered. This schedule is updated and distributed to directors before each Board meeting, Strategic Report giving them the opportunity to suggest or recommend any specific topics to be considered. This schedule is also reviewed and approved, as a separate agenda item, at the May and December Board meetings. Each Board meeting starts with a report from each of the committee’s chairs on the key discussions and decisions considered by the respective committees, providing an opportunity to directors to comment or ask questions on the matters dealt by each committee. This is followed by a general update from the Group Chief Executive and subsequently, from the Chief Financial Officer. The key areas of Board activity during 2018 are outlined below: Corporate Governance Board activities Area Focus Link to Strategic Objectives Strategy and • Joint Board/ Management Committee two-day strategy session, including: planning competitive landscape, customer focus, strategic positioning and performance of each Group business 1 • Introductory session to the 2023 Business Plan • 2019-2023 Group Business Plan and 2019 Financial Plan 2 3 • Group brand portfolio review • Updates on corporate strategy and transactions Performance and • Reports from each of the operating companies monitoring • Quarterly and full year financial reporting Financial Statements • Monthly financial report (reviewed at the relevant meeting or distributed to 1 all Board members) • Customer metrics 2 • Review of different joint business agreements • British Airways pensions update Significant • Dividends distribution and 2018 share buy-back programme transactions, • Launch of new products and fleet reconfigurations investments and • Significant aircraft acquisitions, lease-backs and aircraft-related expenditures financing arrangements Additional Information • Significant maintenance, supply and inventory and engine agreements 1 • Financing arrangement for the acquisition or lease of aircrafts • British Airways litigation review 2 3 • Significant IT investments both at Group or operating company level • IAG Investment rating update • Group Loyalty Programme (Avios) • British Airways and Iberia catering agreements Risk management • Review risk map and risk appetite statements and Internal • Group cyber security office controls • British Airways data breach • Approve going concern and viability statements • Effectiveness review of the internal control and risk management systems • Updates and review of the uncertainties arising from the Brexit process 2 3 • Review and update of the Group Treasury Key Strategic principles • External auditor yearly report to the Board Corporate • MC remuneration scheme and individual performance (Salary review 2018 Governance short and long-term plans, 2017 outcome of variable remuneration plans) • Board and management succession planning • Changes to Group company boards • AGM call notice and proposed resolutions • Review of the Board committee’s composition 1 • Board and committees effectiveness evaluation, and agreed improvement priorities 2 3 • Review feedback from institutional shareholders, roadshows as well a analyst reports • New UK Corporate Governance Code

Link to strategy

1 Strengthening a portfolio Growing global Enhancing IAG’s common of world-class brands leadership positions integrated platform and operations 2 3

www.iairgroup.com 81 CORPORATE GOVERNANCE CONTINUED

As discussed within the Board In addition, an on-site session was Board induction evaluation exercise, the Board priorities organised at Iberia to help non- According to the induction guidelines for 2019 include, in no particular order: executive directors deepen their approved by the Nominations customer experience across brands, knowledge of Iberia’s operations and in Committee, on joining the Board, enterprise risk management (with particular of its maintenance business, every newly appointed director is particular focus on cyber security risk), including a visit to Iberia’s engine offered a comprehensive induction, corporate culture and stakeholders’ workshop. In December, a number of tailored to the directors’ needs. The interests, future business developments non-executive directors participated in a programme includes one-to-one and opportunities within the Group specific briefing session with British meetings with management of IAG strategy and long term priorities, Airways team focused on its commercial and of the main operating companies, including specifically IT/Digital strategy. programmes and customer experience, offering directors a complete overview including the main aspects of the Board information and training of the Group's businesses. passenger journey at Heathrow airport. All Board and committee meeting The purpose of the programme is to documents are available to all directors, Directors are offered the possibility to provide new directors with sufficient including minutes of all Board and update and refresh their knowledge of information to enable him or her to fulfil committees’ meetings. All directors have the business and any technical related directors’ duties and to become as access to the advice of the Board matter on an ongoing basis to enable effective as possible, as quickly as Secretary and the Group General them to continue fulfilling their possible, in the new role. According to Counsel. Directors may take responsibilities effectively. Directors are this, the programme is designed to independent legal, accounting, technical, consulted about their training and provide a wide overview of the industry financial, commercial or other expert development needs and given the and sector, including the business model advice at the Company’s expense when opportunity to discuss training and and particulars of the Group. In addition it is judged necessary in order to development matters as part of their to individual relevant topics as discharge their responsibilities annual individual performance applicable, the basic content of the effectively. No such independent advice evaluation. The Board programme programme is: was sought in the 2018 financial year. includes regular presentations from management and informal meetings to In 2018 the Board received specific build their understanding of the briefings on key developments, such as business and sector. the ongoing negotiations regarding the UK’s exit from the EU and the new UK Corporate Governance Code. In July, a specific training session was also held on blockchain technology.

IAG businesses Legal, regulation and compliance Other/external Business basics and introduction to the IAG Group IAG Communication strategy IAG strategy Spanish and UK Corporate governance Sustainability and Climate Change IAG corporate governance structure IAG brands portfolio review Aviation regulation. IAG regulatory and The Group GBS model government affairs Operating companies IAG compliance programme Shareholders and investors update introductory meetings: • business model • competitive landscape • strategy • current position IAG finance particulars, financial targets, Legal briefing fleet acquisition model, hedging policy Risk map and risk management model Group litigation update Corporate transactions: M&A, competitive landscape, antitrust law and industry regulation

In a second phase of the induction programme, directors have the opportunity to visit the Group’s key sites and to meet with each operating company leadership team, as a deep dive in each of the Group businesses. Finally, and as far as the committees are concerned, newly appointed members are also provided with introductory sessions specific for each committee and designed in accordance with the directors’ interests and needs.

82 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Board and committee evaluation Strategic Report The annual Board review is taken as an opportunity to reflect on the effectiveness of the Board’s work and that of its committees. Following the external evaluation carried out in 2016, this year the review was internally facilitated by the Board Secretary under the supervision of the Chairman, completing the two-year cycle before another externally facilitated evaluation is completed in 2019. The internal process was undertaken by way of a questionnaire, complemented with individual discussions with the Chairman. Building on the initiatives already embedded in the Board’s agenda, this year the evaluation exercise focused on the identification of areas for improvement while ensuring that there are no areas of concern regarding the performance of the Board. The topics considered in the evaluation included Board composition, focus and activities, organisation and use of Board’s time, agenda planning and quality of the information, relationship with management, as well as

training needs. Corporate Governance The Board Secretary shared the findings with the Chairman ahead of a full discussion at the January 2019 Nominations Committee and Board meetings. Following the Board discussion, an action plan was then agreed for the year ahead. The conclusions of this year’s review have been positive and confirmed that the Board and its committees operate effectively, while a number of initiatives and areas for improvement were identified. Outcomes and main improvement initiatives for 2019 2019 Board priorities and activities The Board agreed on the priorities for the year as well as on additional specific topics of interest to be added to those already identified in its 12-month rolling plan of activities. Board and management This remains a continued focus both at Board and management level. Composition succession planning priorities have been discussed and agreed in accordance with the Board refreshment cycle. Financial Statements Particular emphasis will be placed on the Group succession planning and talent development programmes to ensure that there is a structured plan consistent with the Group's values and strategy to identify and develop internal talent. Stakeholder engagement Review the mapping of the Group’s main stakeholders as well as current engagement mechanisms, with particular focus on engagement with the workforce. Formalise and enhance reporting to the Board in this area. Culture Review and agree on relevant culture indicators that would be used to monitor and assess corporate culture throughout the Group.

Board meetings and discussions A number of changes and initiatives were agreed to improve the effectiveness of Additional Information Board meetings.

As part of the Board effectiveness review, each committee undertook its own review supported by the Board Secretary and coordinated with the relevant chair. Each committee considered the feedback from the evaluation and agreed improvement priorities as appropriate. Additionally, the Chairman met with each director individually to discuss their contribution to the Board, the functioning of the Board as a whole, as well as an assessment of performance against the objectives agreed for 2018. Finally, the Senior Independent Director discussed the performance of the Chairman with all the directors. Relations with shareholders The Board is committed to maintaining an open dialogue with shareholders and recognises the importance of that relationship in the governance process. The Chairman is responsible for ensuring that effective communication with shareholders takes place and that directors and executives understand and address investors’ concerns. The Board is briefed on a regular basis by the Group Head of Investor Relations and analysts’ reports are circulated to all directors. The Board has a Shareholder Communication Policy regarding communication and contacts with shareholders, institutional investors and proxy advisors, following the 2015 Spanish Good Governance Code recommendation. This policy is available on the Company’s website www.iairgroup.com. IAG has a comprehensive investor relations programme which aims to help existing and potential investors understand the Group and its businesses. Regular shareholder meetings were held with executive directors, and the investor relations team during 2018. The Chairman, the Chair of the Remuneration Committee, the Senior Independent Director accompanied by the Group Head of Investor Relations, met with many of IAG’s largest shareholders to discuss, amongst other matters, strategy, governance and remuneration. The Group’s medium to long-term plans and targets were discussed in detail in a full day of presentations given by the senior management teams of the Group at the annual Capital Markets day that took place in London on November 2, 2018. Non- executive directors are invited to this meeting, giving major shareholders and investors the opportunity to discuss corporate governance matters with members of the Board. The event was broadcast live via webcast. The presentations are available in full on the Company’s website (www.iairgroup.com), along with the accompanying transcript. Both institutional and private shareholders may contact the Company through a dedicated website, via email and directly by telephone.

www.iairgroup.com 83 CORPORATE GOVERNANCE CONTINUED

Key investor relations activities during the year included: Other statutory Month Event information January Davy Equity Conference, New York and Boston Spain Investor Day, Madrid Directors’ disclosure duties, conflicts of interests, and related February Full Year Results Event, London party transactions Remuneration Interaction, London Directors must inform the Company of March Barclays Travel and Leisure conference, London any participation or interest they may JPM Transport, Aviation Conference, New York hold or acquire in any company that is a competitor of the Group, or any Full Year Results Roadshow, London and Edinburgh activities that could place them in DB Access European Corporate Days, Scandinavia conflict with the corporate interest. European Roadshow, Dublin Directors have an obligation under the Enhanced Equipment Trust Certificate (EETC) Roadshow, US Board Regulations to adopt the European Roadshow, Milan measures necessary to avoid conflict of April Governance Roadshow, London and Edinburgh interest situations. These include any situation where the interest of the European Roadshow, Bilbao director, either directly or through third Full Year Results Roadshow, Madrid parties, may conflict with the corporate European Roadshow, Frankfurt interest or with his duties to the May JPM Amsterdam Investor Forum, Amsterdam company. Directors must disclose to the Board any situation of direct or indirect European Roadshow, Paris conflict that they may have with the June Annual General Meeting, Madrid interests of the Company. In the event European Roadshows, Madrid of conflict, the affected director must CEO Investor Dinner, London abstain from participating in the transaction referred to by the conflict. Davy Transport Conference, London For the purposes of calculating the US Roadshow, New York, Denver and West Coast quorum and voting majorities, the European Roadshow, Vienna affected director would be July Farnborough Air Show, London excluded from the number of members in attendance. August Half Year Results Event, London Mainfirst Transport Conference, Frankfurt In accordance with article 3.4 of the Board Regulations, the Board of September Half Year Results Roadshow, London and Edinburgh Directors has the exclusive authority Citi Growth Conference, London to approve transactions with the Deutsche Bank Airlines Day, New York directors, with shareholders that have Half Year Results Roadshow, New York and Boston a significant holding or with any persons related to them. Half Year Results Roadshow, Madrid UBS Transport Conference, London The execution of these type of transactions or any transaction which November Capital Markets Day, London may entail a conflict of interest need Goodbody European Equity Conference, Dublin to be reported to the Audit and BME Spain All Caps Conference, Madrid Compliance Committee to ensure that US Roadshow, Mid-West &West Coast they are carried out at arm’s length and with due observance of the principle of Far East Roadshow, Asia & Australia equal treatment of shareholders. In the case of transactions that fall within the ordinary course of business and are customary or recurring in nature, and following a report by the Audit and Compliance Committee, the Board may grant a general authorisation as long as they are executed under certain terms and conditions. This authorisation needs to be endorsed by the Shareholders’ Meeting in those cases established in the Spanish companies’ legislation and, in particular, in any transaction with a director valued at more than 10 per cent of corporate assets. In addition to this, and prior to the Audit and Compliance Committee consideration, shareholder related party transactions are also reviewed by the IAG Management Committee and are reported to the IAG Head of Group Audit and Risk Management.

84 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 IAG maintains commercial relationships (ii) issue securities (including warrants) (c) the maximum price which may with Qatar Airways, including cargo convertible into and/or be paid for an ordinary share is Strategic Report capacity agreements, passenger exchangeable for shares of the the highest of: codeshares, wet leases and interline Company, up to a maximum limit (i) an amount equal to five per agreements. As a signifiant shareholder, of 1,500,000,000 euros or the cent above the average of these transactions have been reviewed equivalent thereof in another the middle market by the Audit and Compliance currency, provided that the quotations for the shares as Committee and approved by the Board aggregate share capital that may taken from the relevant of Directors. need to be increased on the stock exchange for the five conversion or exchange of all such Directors’ and Officers’ business days immediately Corporate Governance securities may not be higher than: liability insurance preceding the day on which (a) one-third of the aggregate The Company has purchased that ordinary share is nominal amount of the contracted to be insurance against Directors’ and Company’s issued share capital Officers’ liability for the benefit of the purchased; and as at the date of passing such (ii) the higher of the price of directors and officers of the Company resolution (such amount to be and its subsidiaries. the last independent trade reduced by the amount that the and the highest current Share issues, buy-backs and share capital has been increased independent bid on the treasury shares by the Board under the relevant trading venues where the The Annual General Meeting held on authorisation); and transaction is carried out at June 14, 2018 authorised the Board, with (b) a further one-sixth of the the relevant time; in each the express power of substitution, for a aggregate nominal amount of case, exclusive of expenses. Financial Statements term ending at the 2019 Annual General the Company’s issued share (v) reduce the share capital by Meeting (or, if earlier, 15 months from capital as at the date of passing means of cancelling up to June 14, 2018), to: such resolution in connection 185,000,000 shares (nine per with an offer by way of rights cent of the share capital). (i) increase the share capital pursuant issue (such amount to be to the provisions of Article 297.1.b) reduced by the amount that The shares acquired pursuant to this of the Spanish Companies Law, by: the share capital has been authorisation may be delivered directly (a) up to one-third of the increased by the Board under to the employees or directors of the aggregate nominal amount of the relevant authorisation). Company or its subsidiaries or as a the Company’s issued share result of the exercise of option rights (iii) exclude pre-emptive rights in

capital as at the date of passing held thereby. For further details see Additional Information such resolution (such amount to connection with the capital note 27 to the Group be reduced by the amount that increases and the issuance of financial statements. the share capital has been convertible or exchangeable The IAG Securities Code of Conduct increased by and the maximum securities that the Board may regulates the Company’s dealings in amount that the share capital approve under the previous its treasury shares. This can be may need to be increased by on authorities for the purposes of accessed on the Company’s website the conversion or exchange of allotting shares or convertible or (www.iairgroup.com). any securities issued by the exchangeable securities in Board under the relevant connection with a rights issue or Under the above mentioned authority, authorisation); and in any other circumstances subject the Company purchased 65,956,660 to an aggregate maximum nominal (b) up to a further one-sixth of the shares which were cancelled on amount of the shares so allotted aggregate nominal amount of November 7, 2018 reducing the or that may be allotted on the Company’s issued share share capital in the amount of conversion or exchange of such capital as at the date of passing 32,978,330 euros. securities of five per cent of the such resolution in connection aggregate nominal amount of the with an offer by way of rights Company’s issued share capital as issue (such amount to be at June 14, 2018. reduced by the amount that the share capital has been increased (iv) carry out the acquisition of its own by and the maximum amount shares directly by the Company or that the share capital may indirectly through its subsidiaries, need to be increased by on subject to the following conditions: the conversion or exchange (a) the maximum aggregate of any securities issued by number of shares which is the Board under the authorised to be purchased relevant authorisation). shall be the lower of the maximum amount permitted by the law and such number as represents 10 per cent of the aggregate nominal amount of the Company’s issued share capital on June 14, 2018, the date of passing the resolution; (b) the minimum price which may be paid for an ordinary share is zero;

www.iairgroup.com 85 CORPORATE GOVERNANCE CONTINUED

Capital structure and shareholder rights As of December 31, 2018, the share capital of the Company amounted to 996,016,317 euros (2017: 1,028,994,647 euros), divided into 1,992,032,634 shares (2017: 2,057,989,294 shares) of the same class and series and with a nominal value of 0.50 euros each, fully subscribed and paid. As of December 31, 2018 the Company owned 8,721,835 shares as treasury shares. During 2018, the Company filed four treasury shares reporting statements with the CNMV, as required by Spanish regulations, communicating: (i) the net acquisition of a total of 22,397,653 shares (1.088%) as of June 28, 2018; (ii) the net acquisition of a total of 20,751,635 shares (1.008%) as of August 10,2018; (iii) the net acquisition of a total of 21,499,109 shares (1.045%) as of October 1, 2018; and (iv) the net acquisition of a total of 6,309,669 shares (0.317%) as of November 7, 2018. Company’s share capital Share capital (euros) Number of shares/voting rights November 7, 2018 996,016,317 1,992,032,634

Each share in the Company confers on its legitimate holder the status of shareholder and the rights recognised by applicable law and the Company’s Bylaws which can be accessed on the Company’s website (www.iairgroup.com). The Company has a Sponsored Level 1 American Depositary Receipt (ADR) facility that trades on the over-the-counter market in the US. Each ADR is equivalent to two ordinary shares and each ADR holder is entitled to the financial rights attaching to such shares, although the ADR depositary, Deutsche Bank, is the registered holder. As at December 31, 2018 the equivalent of 21,741,675 shares was held in ADR form (2017: 8.0 million IAG shares). The significant shareholders of the Company at December 31, 2018, calculated according to the Company’s share capital as at the date of this report and excluding positions in financial instruments, were:

Qatar Airways (Q.C.S.C) Capital Research and Management Company Europacific Growth Fund BlackRock Inc Lansdowne Partners International Limited Other shareholders

Name of Number of Number of Name of Percentage shareholder direct shares indirect shares direct holder Total shares of capital Qatar Airways (Q.C.S.C) 426,811,047 – 426,811,047 21.426% Capital Research and – 213,580,659 Collective investment institutions 213,580,659 10.722% Management Company managed by Capital Research and Management Company Europacific Growth Fund 107,329,400 – 107,329,400 5.388% BlackRock Inc – 62,311,368 Funds and accounts managed by 62,311,368 3.128% investors controlled by BlackRock Inc. Lansdowne Partners – 34,102,087 Funds and accounts managed by 34,102,087 1.712% International Limited Lansdowne Partners (UK) LLP

86 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Shareholder’s Meeting represent at least 0.25 per cent of the Impact of change of control Strategic Report The quorum required for the Company’s share capital in nominal The following significant agreements constitution of the shareholder’s value, the Board may also direct that contain provisions entitling the meeting, the system of adopting no transfer of any such shares shall counterparties to exercise termination corporate resolutions, the procedure for be registered. in the event of a change of control of amending the Bylaws and the applicable Limitations on ownership of shares the Company: rules for protecting shareholders’ In the event that the Board deems • the brand alliance agreement in rights when changing the Bylaws are it necessary or appropriate to adopt respect of British Airways and Iberia’s governed by the provisions established measures to protect an operating membership of oneworld, the in the Spanish Companies Law. right of the Company or of its globally-branded airline alliance, could Corporate Governance The Company corporate subsidiaries, in light of the nationality of be terminated by a majority vote of governance information is available its shareholders or any persons with an the parties in the event of a change of on the Company’s website interest in the Company’s shares, it may control of the Company; (www.iairgroup.com) in the adopt any of the measures provided • the joint business agreement between “Corporate Governance” section for such purpose in article 11 of the British Airways, Iberia, American under "Shareholders' Meeting". Bylaws, including the determination of a Airlines and Finnair and the joint maximum number of shares that may be Disclosure obligations business agreement between British held by non-EU shareholders provided Airways, Japan Airlines and Finnair The Company’s Bylaws establish a series that such maximum may not be lower can be terminated by the other parties of special obligations concerning than 40 per cent of the Company’s to those agreements in the event of a disclosure of share ownership as well as share capital. change of control of the Company by certain limits on shareholdings, taking Financial Statements either a third-party airline, or the into account the ownership and control The Board may also (i) agree on the parent of a third-party airline; and restrictions provided for in applicable suspension of voting and other political • certain IAG, Aer Lingus, British legislation and bilateral air transport rights of the holder of the relevant Airways, Iberia and Vueling treaties signed by Spain and the UK. shares, and (ii) request that the holders dispose of the corresponding shares so exchange and interest rate hedging In accordance with article 7.2 b) of the that no non-EU person may directly or contracts allow for early termination Bylaws, shareholders must notify the indirectly own such shares or have an if, after a change of control of the Company of any acquisition or disposal interest in the same. If such transfer is Company, their credit worthiness was of shares or of any interest in the shares not performed on the terms provided materially weaker. of the Company that directly or for in the Bylaws, the Company may In addition, the Company’s share plans indirectly entails the acquisition or acquire the corresponding shares (for contain provisions as a result of which Additional Information disposal of a stake of over 0.25 per cent their subsequent redemption) pursuant options and awards may vest and of the Company’s share capital, or of the to applicable legislation. This acquisition become exercisable on a change of voting rights corresponding thereto, must be performed at the lower of the control of the Company in accordance expressly indicating the nationality of following prices: (a) the book value of with the rules of the plans. the transferor and/or the transferee the corresponding shares according to obliged to notify, as well as the creation the latest published audited balance of any charges on shares (or interests in sheet of the Company; and (b) the shares) or other encumbrances middle market quotation for an ordinary whatsoever, for the purposes of the share of the Company as derived from exercise of the rights conferred by them. the London Stock Exchange’s Daily In addition, pursuant to article 10 of the Official List for the business day on Bylaws, the Company may require any which they were acquired by the shareholder or any other person with a relevant non-EU person. confirmed or apparent interest in shares On 11th February 2019, IAG notified the of the Company to disclose to the stock market that, due to the level of Company in writing such information share ownership by non-EU as the Company shall require relating shareholders, the Board established the to the beneficial ownership of or any maximum number of shares that may be interest in the shares in question, as held by non-EU shareholders at 47.5% of lies within the knowledge of such the Company’s issued share capital. As a shareholder or other person, including consequence and in accordance with any information that the Company IAG’s Bylaws, IAG prohibited further deems necessary or desirable in order acquisitions of IAG shares by non-EU to determine the nationality of the persons until further notice. holders of said shares or other person with an interest in the Company’s shares or whether it is necessary to take steps in order to protect the operating rights of the Company or its subsidiaries. In the event of a breach of these obligations by a shareholder or any other person with a confirmed or apparent interest in the Company’s shares, the Board may suspend the voting or other political rights of the relevant person. If the shares with respect to which the aforementioned obligations have been breached

www.iairgroup.com 87 Report of the Audit and Compliance Committee

Committee members TBU Meetings attended Kieran Poynter (Chair) 27 September 2010 8/8 Patrick Cescau 27 September 2010 8/8 Deborah Kerr 14 June 2018 3/4 María Fernanda Mejía 16 June 2016 8/8 Alberto Terol 02 August 2013 8/8 Kieran Poynter Audit and Compliance Committee Chairman

Dear Shareholder The Audit and Compliance The Committee’s responsibilities Committee continues to play a key The Committee’s principal responsibility was to oversee and give reassurance role in advocating strong internal to the Board with regards to the integrity of financial reporting, audit control, risk management and arrangements and internal controls. The Committee’s activities include: compliance practices across the Group • reviewing the financial statements and announcements of the Group; and ensure these practices keep pace • reviewing significant accounting estimates and judgements made in the with the changes in the business. We representation of financial statements of the Group; have also continued to “deep dive” into • reviewing the effectiveness of the internal control system, provision of key issues such as the British Airways assurance on the risk management process and reviewing the principal data breach and the impact of risks facing the Group; significant accounting changes including IFRS 16. • reviewing and agreeing the internal audit programme, resourcing, effectiveness and resolution of issues raised; I am pleased to welcome Deborah Kerr, • monitoring the internal controls manuals and procedures adopted by the who joined the Committee in June 2018. Company, to verify compliance with them and review the designation and Through her wide technology, digital replacement of the persons responsible for them; and commercial knowledge she is contributing to our high level of • discussing with the external auditors any significant weaknesses in the challenge and support to the internal control environment detected in the course of the audit; and management team. • recommending the appointment of external auditors where appropriate and reviewing their effectiveness, fees, terms of reference and independence. As I look forward to 2019, I believe we are in a good position to comply with During the year, the Committee performed an evaluation of its performance the 2018 UK Corporate Governance and concluded it is operating effectively. An external evaluation process was Code and we will be working closely carried out in 2016. with the management team and the rest of the Board to meet the new requirements. Kieran Poynter Audit and Compliance Committee Chairman

88 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 The Audit and Compliance Committee The Committee will continue to engage Whistleblowing Strategic Report The composition, competencies and with management and take steps to The Committee reviewed procedures operating rules of the Audit and protect the interests of IAG in a whereby staff across the Group can Compliance Committee are regulated no-deal scenario. raise confidential concerns regarding accounting, internal control, auditing by Article 29 of the Board Regulations. British Airways data breach and other matters. There are whistle- A copy of these Regulations can be In September, British Airways blowing channels provided by third- found on IAG’s website. reported the theft of data from its party providers, Safecall and customers as a result of a criminal The Committee’s activities during Ethicspoint, where all staff across the attack on its website. Management the year Group can report concerns to senior have reviewed cyber security to further Corporate Governance The Committee met eight times management in their company. The increase resilience and the Committee during 2018 and continues to refine its Committee also reviewed the volume received regular updates during the approach to management attendance of reports by category and nature; year following the event. at Committee meetings including a timeliness of follow-up; responsibility for review of the agenda in advance of each Compliance and regulatory follow-up, and noted that there were no meeting to ensure the attendees of each Anti-bribery, sanctions and competition significant financial or compliance issues item are appropriate, the inclusion of law compliance raised. The annual review is coordinated private sessions of the Committee The Committee reviewed the Group’s by the Head of Group Audit. members and with both the external anti-bribery, sanctions and competition Financial reporting and internal auditors as appropriate. compliance programmes including updates for organisational changes, Internal Control over Financial In addition to the Secretary and Reporting (ICFR)

latest risk maps, the key focus areas of Financial Statements Deputy Secretary, regular attendees As part of the Group’s internal control 2018 and programme priorities for 2019, at Committee meetings included the framework it complies with the Spanish which include enhancements to the Chairman, the Head of Group Audit corporate governance requirement Group compliance training framework and representatives from the external (ICFR), which is an analysis of risks in and a new Group third-party auditors. The Head of Group Audit financial reporting, the documentation management platform. The Committee reports functionally to the Chairman of accounting processes, and audit of also received an update on the draft IAG of the Committee. internal controls. In 2018 the Committee Code of Conduct including planned reviewed the results of the audits and Members of the management team Group-wide implementation activities no material weaknesses were identified. including the Chief Executive Officer, in 2019. the Chief Financial Officer and the The Committee also tracked the General Data Protection Regulation progress of Internal Audit

Group Financial Controller were invited Additional Information to attend specific agenda items as (GDPR) recommendations. required and when relevant. The Committee received regular updates on the Group’s implementation Enterprise risk management The Committee was updated on Other items reviewed of the new EU Data Privacy Regulation. the principal risks of the Group. The Business, operational and financial risks The updates focused on key decisions Committee reviewed the process by made prior to implementation, the Treasury risk management which risk strategy and appetite had progress against the implementation The Committee continued to review the been assessed to confirm that the plan and ongoing compliance. GDPR Group’s fuel, foreign exchange hedging statements were still relevant and became enforcable in May 2018. positions and financial counterparty appropriate. They also reviewed the exposure on a quarterly basis, including Sustainability performance of the Group against each that the approved hedging profile was The Committee reviewed the of its risk appetite statements and the being adhered to and continued to be progress made in the implementation Committee agreed with management’s appropriate to manage these risks in of the sustainability strategy and the assessment that the Group has operated line with the Group risk appetite. performance against targets in key within its risk appetite framework. UK referendum vote to leave the areas such as carbon footprint and noise European Union performance including the 2050 carbon The Committee considered emissions reduction goal. This also management’s evaluation and risk included a review of progress relating assessment of the arrangements around to sustainable alternative fuels, fuel the UK’s exit from the European Union efficiency and improvements in carbon as part of the review of the principal disclosure including work with the risks and uncertainties of the Group. Carbon Disclosure Project and the This included the regular review of fuel Task Force on Climate Related price sensitivity and foreign exchange Financial Disclosure. rate fluctuations as well as reviewing issues and vulnerabilities in the case of a no deal outcome. In the case of treasury operations, the Committee reviewed management’s contingency plans to ensure business continuity. While there will continue to be uncertainty until agreements are reached, the Committee agrees with management’s current assessment that, even in the event of no-deal, Brexit will have no significant long-term impact on the Group.

www.iairgroup.com 89 REPORT OF THE AUDIT AND COMPLIANCE COMMITTEE CONTINUED

Viability statement The exceptional items arose from the The Group audit was last tendered on In February 2019, the Committee closure of the New Airways Pension the incorporation of IAG in 2010. The reviewed the Group’s viability Scheme to future contributions, the Company intends to comply with the assessment which covered a five-year recognition of additional pension Spanish Act 22/2015, on the Auditing time horizon in line with the Group’s obligations following the Guaranteed requirement to tender the external audit Business Plan period. The analysis Minimum Pension equalisation ruling, at least every ten years and the focused on a combination of risks that and the continuing structural transition arrangements that would could together generate severe but transformation proposals at British require the audit to be tendered for the plausible downturn scenarios. The Airways. The Committee has reviewed year 2021 at the latest. The Board of Committee considered how solvency and agreed with management’s Directors refrain from engaging any and headroom were determined and rationale for recognising these costs and audit firm entitled to be paid by the confirmed the period over which disclosing them as exceptional items by Company for all services rendered fees viability is considered. The Committee virtue of their size and incidence. in excess of 10 percent of such firm’s has a reasonable expectation that the total revenue for the previous year. The The Committee considers whether the Group will be able to continue in current EY partner is Hildur Eir Annual Report and Accounts are fair, operation and meet its liabilities as Jónsdóttir who has held her role since balanced and understandable. The they fall due over the period to 2023. 2016. Committee also reviews disclosure Litigation during the year through a half-yearly Non-audit services provided by the The Committee received regular report from the IAG Disclosure external auditors are subject to a Board litigation status reports from the General Committee outlining all the matters approved policy that prohibits certain Counsel including one about the status they discuss. The Committee is satisfied categories of work and controls the of the remaining civil claims against that the Annual Report and Accounts overall level of expenditure. The British Airways following the 2010 are fair, balanced and understandable Committee reviews the nature and European Commission decision on and has recommended their adoption volume of projects undertaken by the alleged cartel activity with respect to air by the Board. external auditors on a quarterly basis cargo charges. and all projects are either pre-approved External audit or approved by the Committee A number of the civil claims have been The Committee continues to work Chairman for projects over €100,000 or concluded during 2018. The Committee closely with EY, with the engagement of an unusual nature. The overall volume agreed with management’s view that, partners attending seven meetings of work is addressed by a target annual given the status of proceedings, it is not during the year. The Committee maximum of €1.6 million with an possible at this stage to predict the final reviewed the engagement letter, fees additional allowance of up to €1.2 million outcome and no financial provision and the audit plan which included EY’s for large projects where EY are uniquely should be made for the remaining open assessment of risk areas within the placed to carry out the work. civil claims. More detailed information financial statements. Audit results were relating to the cargo litigation is reviewed during the meetings; for the Spend in 2018 was below the target available in note 31 to the Group half year, for the findings from interim maximum at €893,000 with an financial statements. audits, early warning report for year end additional €325,000 relating to two matters, and for the final report for year other advisory engagements. 52 per Accounting matters Company accounting policies are end matters. No significant control cent of the €893,000 spend related to maintained by the Group Finance weaknesses were identified or reported recurring work on the audit of accounts Department, which updates and issues to the Committee by the external required by our Joint Business the Group Accounting Policy manual. auditors in 2018. In assessing the arrangements. Details of the fees paid to Throughout the year, the Committee effectiveness and independence of the the external auditors during the year considers the implications of new external auditors, the Committee can be found in note 6 to the Group accounting standards, reviews complex considered relevant professional and financial statements. accounting transactions, and considers regulatory requirements and the the key estimates and judgements used relationship with the auditors as a whole. in the preparation of the Group financial The Committee monitored the auditors’ statements. In 2018, these included the compliance with relevant regulatory, exceptional items associated with ethical and professional guidance on the pensions and provisions for rotation of partners, and assessed their restructuring costs at British Airways. In qualifications, expertise, resources and addition the Committee considered the the effectiveness of the audit process, implementation of the new accounting including a report from the external standard IFRS 15 ‘Revenue from auditor on its own internal quality contracts with customers’, preparation procedures. The assessment included a for the implementation of IFRS 16 detailed questionnaire completed by ‘Leases’ in 2019, and judgements and key directors, managers and a sample of estimates surrounding income tax accounting staff throughout the Group. provisions, pension transactions, and The questionnaire results demonstrated changes to the estimated useful lives that EY’s overall performance was good. and residual values of certain aircraft. Having reviewed EY’s performance during 2018, the Committee concluded that EY were independent and that it was in the Group’s and shareholders’ interests not to tender the audit in 2019 and recommends their re-appointment.

90 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Report of the Nominations Strategic Report Committee Corporate Governance

Committee members TBU Meetings attended Antonio Vázquez (Chair) December 19, 2013 6/6 Patrick Cescau June 16, 2016 6/6

Emilio Saracho Financial Statements June 16, 2016 6/6 Dame Marjorie Scardino June 16, 2016 5/6

Antonio Vázquez Nominations Committee Chairman Additional Information Dear Shareholder main operating companies, which has The Nominations Committee In my role as Committee Chairman, I am proved to be a very useful development The Nominations Committee has overall pleased to present the Nominations tool. This year we had to say goodbye responsibility for leading the process for Committee’s Report, which summarises to Stephen Kavanagh, who handed over appointments to the Board and to our work over the past year. his leadership of Aer Lingus to Sean ensure that these appointments bring Doyle, British Airways director of the necessary skills, experience and Being one of its prime responsibilities, network, fleet and alliances, proving competencies to the Board, aligning its the Committee has considered the skills once again the privilege of having a composition to the business strategy and experience required to support strong and committed internal pipeline. and needs. the Board’s work in the context of the strategy, challenges and opportunities Management succession planning and The composition, competencies and that the Group faces. This analysis development, together with diversity operating rules of the Nominations concluded last year with the decision to initiatives, have been identified as the Committee are regulated by article 30 look for a new director to reinforce the principal areas for the Committee’s of the Board Regulations. A copy of Board’s expertise and knowledge of focus in 2019. these Regulations can be found on the technology matters, bringing the Antonio Vázquez Company’s website. appointment of Deborah Kerr as a Nominations Committee Chairman These Regulations state that the non-executive director and member of Nominations Committee shall be made the Audit and Compliance Committee. up of no less than three and no more As far as the Board succession planning than five non-executive directors is concerned, the Committee has appointed by the Board, with the particularly focused its attention on the dedication, capacity and experience sequencing of future Board changes. necessary to carry out its function. The nine-year tenure principle set by A majority of the members of the the UK Corporate Governance Code Nominations Committee must be has always been present in our Board independant directors. succession scheduling and in the initial The Committee’s activities in 2018 eight years of our Board being established, we have balanced the need The Committee met six times during for regular board refreshment with that 2018. Directors’ attendance at these of preserving the experience and meetings is shown above and further knowledge gained on our Board. detailed on page 80. IAG Chief Executive was invited to attend We have also reviewed and discussed the Committee's meetings as and management succession planning and when necessary. talent development arrangements, including board appointments in our

www.iairgroup.com 91 REPORT OF THE NOMINATIONS COMMITTEE CONTINUED

In 2018, as part of the Board regular As recommended by the Spanish Good The Committee’s responsibilities refreshment process, the Nominations Governance Code, the Nominations The Nominations Committee’s Committee initiated a non executive Committee reviews compliance with responsibilities are contained in the director search. The Committee this policy on a yearly basis. Board Regulations. These can be reviewed the Board skills matrix, which The basic principles and steps followed summarised as: identifies the core competencies, skills, in every appointment process are: diversity and experience present at the • evaluating the competencies, Board, and discussed priorities • Each search is based on a prior knowledge and experience regarding the profile needed to analysis of the needs of the Board. necessary on the Board and strengthen the Board’s composition. This evaluation is made alongside reviewing the criteria for the succession plans for directors and Board composition and the It was then agreed that the search’s taking into consideration the selection of candidates main focus would be an individual with conclusions from the annual review • submitting the appointment of strong experience of information of Board performance. directors to the Board for technology, including digital • Searches are conducted by selected approval, and reporting on the transformation in companies focused on executive search firms, only engaging proposed designations of the customers and brands. Spencer Stuart with those who are signatories to the members of the Board was engaged to support the recruitment UK Voluntary Code of Conduct for committees and their chairmen process. They have no other connection Executive Search Firms. with the Company other than providing • succession planning for Board • The long-list of potential candidates recruitment services. Spencer Stuart is members making proposals needs to include adequate an accredited firm under the Enhanced to the Board so that such representation of female candidates, UK Code of Conduct for Executive succession occurs in a planned and candidates, as far as possible, Search Firms. and orderly manner from the widest possible pool. • establishing guidelines for the This process led to the appointment • This long-list of candidates is reviewed appointment, recruitment, of Deborah Kerr as a non-executive and discussed by the Nominations career, promotion and dismissal director on 14 June 2018, filling the Committee to produce a short list of senior executives vacancy left by James Lawrence, who which is then circulated to the whole • reporting to the Board on the did not stand for re-election at the 2018 Board for relevant comments or appointment and removal of Shareholders’ Meeting. possible objections. senior executives The Nominations Committee reviewed • The short listed candidatures are • ensuring that non-executive the composition of the committees analysed to ensure compliance with directors receive appropriate and proposed to the Board the the applicable independence tests induction programmes appointment of Nicola Shaw as a • Following this, interviews are • establishing a target for female member of the Remuneration and of conducted with those preselected representation on the Board the Safety Committee, and that of with the participation of different which should adhere to the Deborah Kerr as a member of the Committee members. Company’s Directors Selection Audit and Compliance Committee. • Availability and commitment and Diversity Policy Diversity and Board appointment expectations are discussed with each • submitting to the Board a report process of the candidates, and a rigorous on the annual evaluation of the assessment of each potential The Board places serious importance Board’s performance candidate is completed before the on ensuring that its membership reflects Committee reaches a final decision. diversity in its broadest sense, because In accordance with its responsibilities, it believes that this reinforces the The process led by the Committee to the Committee focused on the following Board’s functioning and ultimately identify, select and make the Board activities during the year: enhances Board discussions and recommendation in relation to the leads to better decision making. appointment of Deborah Kerr is set • the composition of the Board and the A combination of opinions, skills, out below. combined capabilities and experience experiences, backgrounds and of the non executive directors Gender diversity principles are followed orientations on the Board is important throughout the process, while • formulating a refreshment and in providing the range of perspectives, preserving the general diversity and succession plan for the Board, insights and challenge needed to merit based appointment principles covering key positions facilitate the Board’s role. established in the policy. • non-executive director search and When considering directors final appointment of Deborah Kerr Furthermore, when reviewing board appointments, the Committee follows appointments, the Board’s policy is to • reviewing the Board committees’ a formal, rigorous and transparent membership consider candidates from a wide variety procedure, designed to preserve this of backgrounds, without discrimination • Chairman and Group Chief Executive diversity value while ensuring that any based on gender, race, colour, age, annual appraisals appointment is made on merit, and social class, beliefs, religion, sexual • talent management, pipeline and taking into account the specific skills orientation, disability or other factors. mangement succession plans and experience needed at any point in • review of the Board annual evaluation time to ensure continuing Board balance IAG’s Board aspiration to have a 33 per process and conclusions, as well as and relevant knowledge. This procedure cent female representation on the Board that of the Nominations Committee follows the principles established in the by the end of 2020 is formally reflected Company’s Director Selection and in the Directors Selection and Diversity • Board and committees’ changes Diversity Policy, approved by the Board Policy. This target was met in 2018 in 2016. following the appointment of Deborah Kerr as a non-executive director.

92 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report The appointment of Deborah Kerr

1 Search initiated in 2 Executive Search 3 Longlist of potential 4 Shortlist agreed accordance with Firm engaged to candidates and shared with Board succession assist with the search considered the Board plans and specifications discussed and agreed Corporate Governance

5 Interviews completed 6 Nominations 7 Appointment 8 Appointment and feedback Committee announced by the approved by the discussed (other considered final Board, and published Shareholders’ directors invited to candidate and made report for submission Meeting meet short-listed recommendation to to the Shareholders’ candidates) the Board Meeting Financial Statements

This policy also sets out IAG’s All proposals for the appointment or Succession planning commitment to strengthen the gender re-election of directors presented to The Committee regularly reviews the balance on IAG’s leadership and senior the 2018 Shareholders’ Meeting were formal succession plan for the Board, management teams. IAG’s Management accompanied by an explanatory report including analysis of director’s length of Committee is responsible for improving issued by the Board of Directors with tenure, skills and experience. IAG follows diversity within management and the support of the Nominations both the Spanish and the UK corporate generally across the Group. The Committee assessing the competence, governance standards, adapting to Additional Information Nominations Committee is committed experience and merits of each the most stringent requirements. to improving diversity, and gender candidate. Following this review, the The Board’s refreshment cycle is diversity in particular, within the Group, Committee was of the opinion that determined in accordance with UK and encourages and supports Group each non executive director submitting principles, whereby non-executive initiatives in this respect. Relevant him or herself for re-election continued directors' tenure should not exceed details on diversity can be found page to demonstrate commitment to the nine years. 63 of the Sustainability section. role as a member of the Board and its committees, discharged his or her duties Succession planning for the top 50 Directors independence, performance effectively and that each was making a leadership positions in the Group was and availability valuable contribution to the presented and discussed at the The Nominations Committee, having leadership of the Company for September Nominations Committee considered the matter carefully, is the benefit of all shareholders. meeting. This succession planning of the opinion that all of the current schedule is reviewed and updated non-executive directors remain According to article 17.5 of the Board by the IAG Management Committee independent, both in line with the Regulations, unless otherwise authorised on a quarterly basis. definition set out by the Spanish by the Nominations Committee, a The Committee annual evaluation Companies Act and with that of the non-executive director cannot hold UK Corporate Governance Code, more than six other directorships, The annual performance evaluation and are free from any relationship including only four in a listed company. was conducted internally by the Board Secretary under the supervision of the or circumstances that could Executive directors can only hold one Committee Chairman. The results of affect, or appear to affect, their directorship in another public listed this exercise were discussed at the independent judgement. companies. In any event, prior consent Nominations Committee meeting from the Nominations Committee is Having served on the Board for more held in January 2019. The evaluation required before an executive director than six years, the Committee undertook concluded that the Committee operated can accept any external directorship a particularly rigorous review in respect effectively during 2018. of Patrick Cescau and Kieran Poynter, appointment. The Committee has agreed to prioritise including their independence. The Board Induction of directors remains satisfied that they both remain its focus on the review of the Group's A comprehensive induction programme framework for management succession independent and will continue to make a was initiated for Deborah Kerr in July valuable contribution. and talent development, as well as on 2018 and has been arranged following the initiatives to improve gender IAG’s induction guidelines as approved diversity within the Group. by the Nominations Committee. This is described in more detail on pages 92 and 93.

www.iairgroup.com 93 Report of the Safety Committee

Committee members

Date appointed Meetings attended Willie Walsh (Chair) October 19, 2010 2/2 Antonio Vázquez October, 19 2010 2/2 Marc Bolland June 16, 2016 2/2 Kieran Poynter October 19, 2010 2/2 Nicola Shaw June 14, 2018 1/2 Willie Walsh Safety Committee Chairman

Dear Shareholder thank him for his work and dedication to In addition to this, the Committee In 2018, the Safety Committee continued British Airways and to IAG. considered the Group annual report on dangerous goods, as well as specific its routine work monitoring the safety Willie Walsh performance of IAG’s airline companies, Safety Committee Chairman reports on British Airways risk models as well as the systems and resources for critical controls and the Group The Safety Committee dedicated to safety activities across the coordination on training on emergency Group. We were pleased to welcome The Committee composition, response planning. Nicola Shaw as a new member to the competencies and operating rules are Committee in June. regulated by article 32 of the Board The Committee’s responsibilities Regulations. The Committee is made As I do every year, I like to highlight the up of no fewer than three and no more Responsibility for safety matters role that this committee plays within our than five directors appointed by the belongs to the Group’s airlines. Group, partly to be clear about our remit Board, with the dedication, capacity IAG, through its Safety Committee, as a committee and partly to emphasize and experience necessary to carry out has an overall view of each airline’s its uniqueness and its value in the Group their function. safety performance and of any context. Safety and security important issues that may affect responsibility lies with each Group airline In addition to Committee members, the industry. The Committee also in accordance with its applicable senior managers with responsibility for has visibility of the Group airlines’ standards, its own culture and the safety matters are invited to attend and resources and procedures. circumstances and particularities of report at Committee meetings as and Responsibility for performing each business. IAG’s Safety Committee when required. During 2018, the British detailed and technical exercises a high-level overview of safety Airways Director of Safety and Security, assessments remains with each activities to ensure a minimum Group representatives of the Iberia and airline, overseen by their respective standard, but more importantly it fosters Vueling safety teams and the Aer safety committees. Lingus Corporate Safety and Risk the Group homogenisation effort in The Committee’s duties include: safety reporting, the discussion of Manager attended meetings. • to receive significant safety common issues and the sharing of The Committee’s activities information about IAG’s best-practices between Group airlines. during the year subsidiaries, franchise, codeshare This year the Committee saw the During 2018, the Committee held two or wet-lease providers used by retirement, of Captain Tim Steeds, after meetings. Directors’ attendance at these any member of the Group meetings is shown above and further 44 years with British Airways. Tim • to exercise a high-level overview detailed on page 80. played a key role in the development of of safety activities and resources British Airways Safety and Security Key topics discussed for each airline • to inform the Board and to follow Management System and of its culture, under their regular safety review include up on any safety-related matters but he also made a key contribution to information on safety risk management, as determined by the Board the setting up and coordination of safety culture, operational risks, safety matters at IAG. I would like to • to carry out any other safety- occupational injury risks, as well as related functions assigned by reported data on aircraft damage. the Board

94 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Report of the Remuneration Strategic Report Committee Corporate Governance

Committee members

Date appointed Meetings attended Marc Bolland (Chair) June 16, 2016 4/5 Dame Marjorie Scardino (Chair until January 24, 2019) 4/5

December 19, 2013 Financial Statements Maria Fernanda Mejia October 30, 2014 5/5 Alberto Terol December 19, 2013 5/5 Nicola Shaw Dame Marjorie Scardino January 1, 2018 2/2 Chairman of the Remuneration Committee Additional Information From Dame Marjorie Scardino gave a solid vote in favour at the role-specific objectives allows us to focus on key strategic and business Dear Shareholder, meeting in June 2018. targets which may not be suitably IAG’s executive remuneration This will be my final report to you, as captured under the financial or framework aims to support the business Marc Bolland has succeeded me as customer elements. Chairman of the Committee from objectives and the financial targets January 24, 2019. Marc will sign this attached to them through the following The policy in general is designed to report on behalf of the Board. two schemes: deliver total remuneration that is competitive and with a strong emphasis The Company’s long-term incentive Overall strategy and link to on “pay for performance”. The plan, known as the performance remuneration Committee will continue to ensure that share plan (PSP), measures our IAG’s aim is to become the world’s executive remuneration is aligned with performance by: leading international airline group. Its our business strategy and that the strategy is to create value and • earnings per share (EPS), adjusted for overall reward framework for 2019 and sustainable returns through leadership exceptional items, which reflects the beyond is in the best interests of our in core markets and the realisation of profitability of our business and the shareholders. cost and revenue synergies across our core elements of value creation for Summary of performance and airlines and aviation related businesses. our shareholders. Growing earnings incentive outcomes indicates that the Group is on the That strategy is executed and sustained right path to create value for our The PSP that was awarded in 2016 had by consistent and strong financial shareholders; a three-year performance period (2016 performance and return on investment • total shareholder return (TSR) to to 2018), and had the same performance in each part of the Group. We have measures as current awards. transformed programmes through the ensure alignment with our shareholders; and Performance targets for all use of the IAG Platform at each of our three measures were set at the • Return on Invested Capital (RoIC) to airlines, while leveraging opportunities beginning of 2016 at a level that the assess efficient return on the Group’s across the Group. Committee considered to be asset base. The central focus of the Committee in appropriately stretching based on the early part of 2018 was completing The annual incentive plan has its main internal and external expectations for the review of the Company’s focus on strong financial performance, performance. and therefore the primary measure in Remuneration Policy in readiness for The Company has produced strong the plan is the Group’s operating profit submission to the annual Shareholders’ financial performance over the last three before exceptional items. A customer Meeting. In reviewing the policy, the years, leading to 2018 adjusted EPS measure, Net Promoter Score, was Committee’s main objective has been to reaching 117.7 euro cents. As a result, the introduced for the first time at the ensure remuneration retains a strong 2016 PSP has an outcome of 39 per cent Group level in 2017, and this drives a link to the strategy, because we see that of its maximum for the EPS element. stronger focus on improving customer as the best way to drive performance. RoIC in 2018 reached 16.6 per cent, advocacy as a source of competitive We were delighted that shareholders resulting in an outcome of 100 per cent advantage. Lastly, performance against of its maximum level for the RoIC

www.iairgroup.com 95 REPORT OF THE REMUNERATION COMMITTEE CONTINUED

element. TSR for the Company has Working with shareholders grown by 15 per cent over the three We have met with many of the largest years, but has underperformed against shareholders over the past year, and we the index that the Company measures appreciate their constructive comments itself against, resulting in a zero payout about remuneration in general. In our for the TSR element. Overall, this has meetings with them, we reviewed what resulted in the 2016 PSP award having was considered best practice. We were an outcome of 46 per cent of the very pleased with their support for our maximum. The PSP award has an final Remuneration Policy changes. Our additional two-year holding period. This overall intention throughout has been to applies until the end of 2020. ensure that we have a strong alignment The financial target for the 2018 annual to our strategy because we think that is incentive plan set at the beginning of the way to create long-term, sustainable the year was for an IAG operating profit shareholder value. of €3.15bn. Strong financial performance Dame Marjorie Scardino during the year has led to IAG operating profit slightly exceeding this target and Chairman of the Remuneration paying out at 66 per cent of the Committee maximum level for the 60 per cent weighting linked to financial performance. The result for Net forward to working with you closely Promoter Score was below the as Chair, as the Committee and I seek threshold level at which payments begin to ensure that remuneration at IAG – although some airlines in the Group continues to be aligned with, and saw strong customer performance, the drives delivery of, our business and overall Company score is pulled down strategic priorities. by Vueling, who had a very challenging year, caused partly by external factors Looking ahead, 2019 promises to be such as air traffic control issues. another busy year. We will continue to focus on ensuring that there is Decisions during 2018 alignment between performance and Following the approval of the new pay outcomes, ensuring that the Remuneration Policy at the 2018 annual management team receive fair Shareholders’ Meeting, the Committee outcomes under our incentive plans has considered how the policy will be Marc Bolland only where this can be supported by Chairman of the Remuneration company and individual performance. applied for 2019 and beyond. In Committee particular, the Committee has reviewed In addition, the Committee will keep the new UK Corporate Governance From Marc Bolland working through the implications for Code which was published during 2018, IAG of the new UK Corporate This is my first report to you as and is committed to embracing the Governance Code (the “Code”). We Chairman of the Remuneration principles of the revised Code. The fully support the principles behind the Committee, having succeeded Dame Committee has undertaken an initial new Code, and took steps in 2018 to Marjorie Scardino on January 24, review of our remuneration framework, address some of the new provisions. 2019. I would like to take the and in many areas, the Company is We look forward to reviewing opportunity to thank Dame Marjorie already compliant with the terms of how the remaining areas can be for her excellent work in the role over the revised Code: for example the implemented in the most the past three years and I am very Committee has always reviewed and effective manner for IAG and much looking forward to serving you approved the remuneration policy for all our stakeholders. in this new role. the first layer of management below On behalf of the Committee, Board level. The Committee is IAG has always recognised the need I appreciate your time in reading committed to complying with all the to build strong relationships with our our 2018 DRR and I hope that you provisions of the Code in 2019. The investors through a process of open find it accessible and informative. Committee has also reviewed the and transparent dialogue. It is UK Government changes to pleasing that this has been reflected Approved by the Board and signed reporting regulations. in strong shareholder support for our on its behalf by remuneration policies and practices Marc Bolland in recent years. I very much intend to Chairman of the Remuneration continue with this approach and look Committee

96 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

At a Glance Implementation of Remuneration Policy in 2018 The following two charts show Company performance for the two corporate measures in the 2018 annual incentive plan. Financial performance and customer performance has resulted in 66 per cent and 0 per cent vesting respectively:

IAG Operating Profit (before exceptional items) Net Promoter Score

Target Range for THRESHOLD TARGET MAXIMUM Target Range for THRESHOLD TARGET MAXIMUM Financial Statements the 2018 Annual the 2018 Annual 2.9 3.15 3.4 18 20 22 Incentive Plan Incentive Plan

Actual 2018 Actual 2018 3.23 16.3 Performance Performance

2.6 2.8 3.0 3.2 3.4 3.6 3.8 14 16 18 20 22 24 €bn

66% 0% Vesting (%) Vesting (%)

0 20 40 60 80 100 0 20 40 60 80 100 Additional Information The following four charts show Company performance for the three performance measures in the 2016 PSP award, and share price performance:

Total Shareholder Return Share Price

Target Range THRESHOLD MAXIMUM for the 2016 0 8 PSP Award 611 January 2016 Actual 2016-2018 -6% Performance PSP Award Date 541 -10 -5 0 5 10 15 20 (March 2016) Outperformance of the Index (% p.a.)

0% 53% 618 Vesting (%) December 2018

0 20 40 60 80 100 0 100 200 300 400 500 600 700 Pence

Strong EPS and return performance in 2018 has resulted in good vesting levels for the following two measures in the 2016 PSP award:

Adjusted Earnings per Share Return on Invested Capital

Target Range for THRESHOLD MAXIMUM Target Range for THRESHOLD MAXIMUM the 2016 the 2016 105 145 12 15 PSP Award PSP Award

Actual 2018 Actual 2018 117.7 16.6 Performance Performance

90 100 110 120 130 140 150 10 11 12 13 14 15 16 17 Euro Cents %

39% 100% Vesting (%) Vesting (%)

0 20 40 60 80 100 0 20 40 60 80 100

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Introduction Directors’ Remuneration Policy The Remuneration Committee takes responsibility for the preparation of the report, which is approved by the Board. Key elements of pay The Company’s current policy on directors’ remuneration Executive directors was approved by shareholders at the annual Shareholders’ The Company’s remuneration policy aims to provide total Meeting on June 14, 2018. It is intended that this policy will remuneration packages which are linked to the business apply for three years, and therefore there are no changes strategy, are competitive, and take into account each to the policy this year. individual’s performance of their role in the Company’s work. As a Spanish incorporated company, IAG is subject to The Committee is updated on pay and conditions of the Spanish corporate law. The Spanish legal regime regarding employees within the Group and takes this into account when directors’ remuneration is substantially parallel to that of considering executive directors’ remuneration. the UK as far as directors' remuneration disclosure and The policy as approved by shareholders at the annual approval requirements are concerned. Shareholders’ Meeting on June 14, 2018 was shown in full in The Company welcomes the opportunity provided by the 2017 Directors’ Remuneration Report and is not repeated Spanish CNMV allowing companies to prepare free format here. The only sections of the policy shown on the following reports. Therefore, IAG is presenting a consolidated report pages are the sections where we have chosen to update the this year responding to Spanish and UK disclosure data for this year, i.e. the remuneration scenarios charts and requirements. This report will be accompanied by a duly the date of last re-election of the non-executive directors. completed form which is required by the CNMV covering some relevant data. This is prepared in accordance with Spanish legislation and is available on the Company’s website, and the CNMV website. It is the Company’s intention once again to comply voluntarily with all reporting aspects of the UK legislation of 2013 and to follow best practice UK standards, for the benefit of our UK shareholder base. In addition to the Remuneration Committee Chairman’s statement, this Directors’ Remuneration Report contains two sections: • The first section covers the segments of the Directors’ Remuneration Policy that require an updating of the data each year. • The second section, the Annual Report on Remuneration, covers the information on directors’ remuneration paid in the reported year. Accompanying the Report, the CNMV mandatory form will be available on the Company's website and the CNMV website.

98 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Remuneration scenarios A significant portion of the Company’s total remuneration package is variable, with emphasis placed on longer-term reward to align closely executive directors’ and senior managers’ interests with shareholder interests. The charts below show, for 2019 and for each executive director, the minimum remuneration receivable, the remuneration receivable if the director performs in line with the Company’s expectations, the maximum remuneration receivable, and the maximum remuneration receivable with 50 per cent share price growth. Apart from the final bar (showing 50 per cent share price growth) on each chart, share price variation during the performance period is not taken into consideration in these scenarios. Financial Statements Chief Executive Officer of IAG Chief Financial Officer of IAG Fixed remuneration is basic salary (2019 level of €962,000), Fixed remuneration is basic salary (2019 level of €645,000), plus taxable benefits (2018 actual of €31,000) plus pension plus taxable benefits (2018 actual of €31,000) plus pension related benefits (2018 actual of €241,000). related benefits (2018 actual of €157,000). The annual incentive amount is zero at the minimum The annual incentive amount is zero at the minimum remuneration level, €962,000 at the on-target level (100 per remuneration level, €484,000 at the on-target level cent of salary), and €1,924,000 at maximum (200 per cent (75 per cent of salary), and €968,000 at maximum (150 per of salary). cent of salary). The long-term incentive amount is zero at the minimum The long-term incentive amount is zero at the minimum remuneration level, €962,000 at the on-target level (half of remuneration level, €484,000 at the on-target level (half of Additional Information the face value award of 200 per cent of salary), €1,924,000 at the face value award of 150 per cent of salary), €968,000 at maximum (200 per cent of salary), and €2,886,000 at the maximum (150 per cent of salary), and €1,452,000 at the maximum with 50 per cent share price growth. maximum with 50 per cent share price growth. All amounts are actually paid in sterling, and are shown here in All amounts are actually paid in sterling, and are shown here in euro at the €:£ exchange rate of 1.1317. euro at the €:£ exchange rate of 1.1317.

€000 €000 Maximum, Maximum, plus share 1,234 1,924 2,886 plus share 833 968 1,452 6,044 3,253 price growth (20%) (32%) (48%) price growth (25%) (30%) (45%)

1,234 1,924 1,924 833 968 968 5,082 2,769 Maximum (24%) (38%) (38%) Maximum (30%) (35%) (35%)

1,234 962 962 833 484 484 3,158 1,801 On-target (40%) (30%) (30%) On-target (46%) (27%) (27%)

1,234 1,234 833 833 Minimum Minimum

0 1000 2000 3000 4000 5000 6000 7000 0 1000 2000 3000 4000 5000 6000 7000 Fixed remuneration Fixed remuneration Annual Incentive Annual Incentive Long Term Incentive Long Term Incentive

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Service contracts and exit payments policy Non-executive directors Non-executive directors (including the Chairman) do not have service contracts. Their appointment is subject to the Board regulations and the Company’s Bylaws. They do not have the right to any compensation in the event of termination as directors. Board members shall hold office for a period of one year. The dates of the Chairman’s and current non-executive directors’ appointments are as follows: Date of the first Non-executive director appointment Date of last re-election Antonio Vázquez May 25, 2010 June 14, 2018 Patrick Cescau September 27, 2010 June 14, 2018 Kieran Poynter September 27, 2010 June 14, 2018 Alberto Terol June 20, 2013 June 14, 2018 Dame Marjorie Scardino December 19, 2013 June 14, 2018 María Fernanda Mejía February 27, 2014 June 14, 2018 Marc Bolland June 16, 2016 June 14, 2018 Emilio Saracho June 16, 2016 June 14, 2018 Nicola Shaw January 1, 20181 June 14, 2018 Deborah Kerr June 14, 2018 –

1 Appointment approved by the annual Shareholders’ Meeting on June 15, 2017 but effective January 1, 2018.

100 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Annual Remuneration Report The Remuneration Committee The Committee’s composition, competencies and operating rules are regulated by article 31 of the IAG Board Regulations. A copy of these Regulations is available on the Company’s website. Beyond executive directors, the Committee oversees the general application of the remuneration policy to the IAG Management Committee (and also occasionally considers remuneration matters of managers generally across the Group). According to article 31 of the Board Regulations the Remuneration Committee shall be made up of no less than three and Financial Statements no more than five non-executive directors appointed by the Board, with the dedication, capacity and experience necessary to carry out their function. A majority of the members of the Remuneration Committee shall be Independent directors. Dame Marjorie Scardino chaired the Committee until January 24, 2019, being succeeded by Marc Bolland. For the reporting period all members were considered Independent non-executive directors of the Company and none of the members has any personal financial interest, other than as a shareholder, in the matters to be decided. The Committee’s activities during the year In 2018, the Committee met five times and discussed, amongst others, the following matters: Meeting Agenda items discussed January Review of IAG Management Committee members’

basic salaries Additional Information Approval of the 2018 annual incentive plan Approval of the 2018 Performance Share Plan February 2017 annual incentive plan payments to IAG Management Committee members Vesting outcome of the Performance Share Plan 2015 award Final review of 2017 Directors’ Remuneration Report May Preparation for the AGM October Executive remuneration market update Remuneration strategy for 2019 Review of the new UK Corporate Governance Code December Approval of remuneration for a new Management Committee member

Advisers to the Committee The Committee appointed Deloitte as its external adviser in September 2016. Deloitte report directly to the Committee. The fees paid to Deloitte for advice provided to the Remuneration Committee during 2018 were €43,285, charged on a time and materials basis. Deloitte is a member of the Remuneration Consultants Group and a signatory to the voluntary UK Code of Conduct. As well as advising the Remuneration Committee, other Deloitte teams provided advice in relation to remuneration, pensions, global employment programmes, data governance, internal audit and tax to the Group in 2018. The Committee has reviewed the remuneration advice provided by Deloitte during the year and is comfortable that it has been objective and independent. The Company obtained high level headline remuneration survey data from a variety of sources. During the year, the CEO of IAG provided regular briefings to the Committee apart from when his own remuneration was being discussed.

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Single total figure of remuneration for each director Subject to full audit Non-executive directors Total for Total for year to year to Director Taxable December 31, Taxable December 31, (€’000) 2018 fees benefits 2018 2017 fees benefits 2017 Antonio Vázquez 645 4 649 645 35 680 Patrick Cescau 150 37 187 150 47 197 Marc Bolland 120 6 126 120 6 126 Deborah Kerr1 65 4 69 – – – Baroness Kingsmill2 – – – 55 12 67 James Lawrence3 55 4 59 120 13 133 María Fernanda Mejía 120 10 130 120 17 137 Kieran Poynter 140 27 167 140 21 161 Emilio Saracho 120 18 138 120 26 146 Dame Marjorie Scardino 140 68 208 140 89 229 Nicola Shaw4 120 7 127 – – – Alberto Terol 120 22 142 120 36 156 Total (€’000) 1,795 207 2,002 1,730 302 2,032

1 Deborah Kerr joined the Board on June 14, 2018 2 Baroness Kingsmill retired from the Board on June 15, 2017 3 James Lawrence retired from the Board on June 14, 2018 4 Nicola Shaw joined the Board effective January 1, 2018, appointment approved by the annual Shareholders’ Meeting on June 15, 2017 Additional explanations in respect of the single total figure table Each director has confirmed in writing that they have not received any other items in the nature of remuneration other than those already disclosed in the table above. Fees Fees paid in the year for non-executive directors. Taxable benefits Taxable benefits including personal travel. For the year to December 31, 2018, €:£ exchange rate applied is 1.1317 (2017: 1.1461). Executive directors The table below sets out the single total figure and breakdown for each executive director. An explanation of how the figures are calculated follows the table. The remuneration for each executive director reflects the performance of the Company and the contribution each individual has made to the ongoing success of the Company.

102 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

2018 Total for Pension Annual Long-term year to Base Taxable related incentive incentive December 31, Director (’000) salary benefits benefits award vesting 2018 Executive directors Willie Walsh (GBP)1 850 27 213 1,051 889 3,030 Willie Walsh (euro) 962 31 241 1,189 1,006 3,429 1 Enrique Dupuy de Lôme (GBP) 557 27 139 498 412 1,633 Financial Statements Enrique Dupuy de Lôme (euro) 630 31 157 564 466 1,848 Total (€’000) 1,592 62 398 1,753 1,472 5,277

1 Willie Walsh and Enrique Dupuy de Lôme remuneration is paid in sterling and expressed in euro for information purposes only. Additional explanations in respect of the single total figure table for 2018 Each director has confirmed in writing that they have not received any other items in the nature of remuneration other than those already disclosed in the table above. Base salary Salary paid in year for executive directors. Additional Information Taxable benefits Taxable benefits including personal travel and, where applicable, a company car, fuel and private health insurance. Pension related benefits Employer contribution to pension scheme, and/or cash in lieu of pension contribution. Annual incentive plan Annual incentive award for the period ended December 31, 2018 (accrued at December 31, 2018, but cash payments (50 per cent of the award) not paid until March 2019). The outcomes of the performance conditions which determined the award are described in the next section. Half of the annual incentive award is deferred into shares for three years (Incentive Award Deferral Plan (IADP)). For the 2018 annual incentive plan, these will vest in March 2022. Long-term incentive vesting This relates to the IAG PSP 2016 award based on performance measured to December 31, 2018, although the shares vested will not be delivered until January 1, 2021, i.e. after the two-year holding period. For the purposes of this table, the award has been valued using the average share price in the three months to December 31, 2018 of 612.2 pence. The outcomes of the performance conditions which determined vesting are described below. For the year to December 31, 2018, €:£ exchange rate applied is 1.1317 (2017: 1.1461). 2017 Total for Pension Annual Long-term year to Base Taxable related incentive incentive December 31, Director (’000) salary benefits benefits award vesting 2017 Executive directors Willie Walsh (GBP)1 850 25 213 1,580 1,286 3,954 Willie Walsh (euro) 974 29 244 1,810 1,474 4,531 Enrique Dupuy de Lôme (GBP)1 547 20 137 732 467 1,903 Enrique Dupuy de Lôme (euro) 627 23 157 839 535 2,181 Total (€’000) 1,601 52 401 2,649 2,009 6,712

1 Willie Walsh and Enrique Dupuy de Lôme remuneration is paid in sterling and expressed in euro for information purposes only. Life insurance The Company provides life insurance for all executive directors. For the year to December 31, 2018 the Company paid contributions of €22,987 (2017: €16,839).

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Variable pay outcomes Subject to audit 2018 Annual Incentive Plan At the beginning of 2018, the Board, upon a recommendation by the Committee, set IAG operating profit (before exceptional items) as the financial target in the annual incentive plan for that year, with a 60 per cent weighting. Operating profit was considered to be the most appropriate financial measure in aligning shareholder interests with the Company. For the customer measure, there was a weighting of 15 per cent. Outcomes were calculated based on Net Promoter Score (NPS). NPS is used to gauge the loyalty of the Group’s customer relationships. It is calculated based on survey responses, by subtracting the percentage of customers who are ‘Detractors’ from the percentage of customers who are ‘Promoters’. The final 25 per cent weighting is based on personal performance against objectives. The Remuneration Committee, on the proposal of the Chairman, considered the Chief Executive Officer’s performance against his objectives; and on the proposal of the Chief Executive Officer, considered the Chief Financial Officer’s performance against his objectives. Both performance evaluations were submitted to the Board for final approval on February 27, 2019. The maximum award for the Chief Executive Officer of IAG was 200 per cent of salary (100 per cent of salary for on-target performance), and for the Chief Financial Officer of IAG 150 per cent of salary (75 per cent of salary for on-target performance). The outcomes of the performance conditions were as follows: Measure Chief Executive Officer of IAG Chief Financial Officer of IAG IAG operating profit Payout €761,860 €374,432 (before exceptional items) £673,200 £330,858 (60 per cent) per cent of 66 per cent 66 per cent maximum awarded Please see below for details of Please see below for details of the performance target ranges the performance target ranges Group Net Promoter Score Outcomes versus targets €0 €0 (15 per cent) £0 £0 Please see below for details of Please see below for details of the performance target ranges the performance target ranges per cent of 0 per cent 0 per cent maximum awarded Personal performance Outcomes versus targets €428,066 €189,107 against objectives £378,250 £167,100 (25 per cent) Please see below for details of Please see below for details of the extent of the achievement the extent of the achievement of objectives. of objectives. per cent of 89 per cent 80 per cent maximum awarded Details of any discretion exercised Overall outcome €1,189,926 €563,539 £1,051,450 £497,958

Half of the overall outcome of the annual incentive detailed above is payable in deferred shares in the Company vesting after three years (under the Incentive Award Deferral Plan). IAG operating profit (before exceptional items) for 2018 (60 per cent of the annual incentive) was between the on-target level and the stretch target level and has resulted in 66 per cent of the maximum paying out for this element of the incentive (2017: 100 per cent). The target range for 2018 was as follows: the threshold level at which payments would begin was €2,900 million, the on-target level at which 50 per cent of the maximum would pay out was €3,150 million, and the stretch target level at which the maximum would pay out was €3,400 million. There was a straight line sliding scale between the threshold level and the on-target level, and between the on-target level and the stretch target level. Net Promoter Score for 2018 (15 per cent of the annual incentive) achieved 16.3, which is below the threshold level at which payments begin for this element (2017: 60 per cent of the maximum). The target range for 2018 was as follows: the threshold level at which payments would begin was 18.0, the on-target level at which 50 per cent of the maximum would pay out was 20.0, and the stretch target level at which the maximum would pay out was 22.0. There was a straight line sliding scale between the threshold level and the on-target level, and between the on-target level and the stretch target level.

104 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Personal Performance In assessing personal performance, the Committee considers a range of factors to ensure there is a holistic and detailed assessment of the executive directors’ contribution to the overall strategic priorities of the Group. This is summarised below for executive directors:

Chief Executive Officer of IAG Chief Financial Officer of IAG Unrivalled customer proposition Unrivalled customer proposition • Leading the Group’s commitment to strengthening • Supported the significant focussed investment at each

its customer focus, ensuring that each of the airline to strengthen customer focus and improve the Financial Statements airlines invested significantly in improving their customer experience customer experience • Continued focus on reducing costs and improving • This included British Airways delivering catering efficiency by leveraging Group scale and synergy improvements, opening new lounges, investing in opportunities. This has ensured customer and technology, and extending the use of biometric boarding shareholder value creation gates; and Iberia delivering an improved customer Value accretive and sustainable growth experience in its premium economy product • Supporting the CEO as the Group delivered a strong • Overseeing the launch of shorthaul operations under the performance in 2018 with operating profit, earnings per LEVEL brand, and the further launch of longhaul share and Return on Invested Capital all increasing LEVEL services • Careful management of financial risk, maintaining Additional Information Value accretive and sustainable growth adequate cash balances and substantial committed • The CEO of IAG is respected across the global airline financing facilities industry, and during 2018 became Chairman of Airlines • Development of an internal framework to assess the For Europe, the largest airline association in Europe value to shareholders which would potentially be created • Reinforcing the Group’s leadership positions in its home by organic and inorganic growth opportunities markets with the addition of 48 new routes Efficiency and innovation • Continuing to optimise the Group’s longhaul network • Proactive leadership to continue the focus on disciplined and customer proposition together with its joint capital allocation, active portfolio management, and business partners flexible and rapid decision making • Overseeing the activity to be a leading airline group with • Driving the CASK ex-fuel cost reduction – 11.1 per cent regard to sustainability, including the option to acquire a reduction at constant currency since IAG’s founding site to develop the UK’s first commercial scale waste to in 2011 jet fuel project Efficiency and innovation • Continuing the focus on efficiency and cost reduction programmes to ensure customer and shareholder value creation • Ensuring that digital innovation has remained a core part of the Group’s focus, continuing the Hangar 51 accelerator programmes to attract global talent, and making strategic investments to automate the business above and below the wing • Continuing to develop capabilities to support data customisation and data analytics, allowing Avios members a smoother online experience • Continuation of the roll out of Wi-Fi connection on the Group’s fleet

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IAG PSP award 2016 The IAG PSP award granted on March 7, 2016 was tested at the end of the performance period which began on January 1, 2016 and ended on December 31, 2018. The awards were equivalent to 200 per cent of salary for the Chief Executive Officer of IAG and 150 per cent of salary for the Chief Financial Officer of IAG. One-third of the award was subject to a TSR performance condition measured against an index, one-third subject to achievement of the Company’s adjusted EPS targets (diluted EPS, adjusted for exceptional items), and one-third subject to a RoIC performance condition. The vesting of any award was subject to the Board being satisfied that the Group’s underlying financial performance was satisfactory in the circumstances prevailing over the three-year period. The outcome of the performance condition was as follows: Vesting Measure Threshold Maximum Outcome (as per cent award granted in 2016) TSR performance IAG’s TSR IAG’s TSR IAG underperformed 0 per cent compared to the TSR performance equal to performance exceeds the index by 6 per performance of the the index (25 per cent index by 8 per cent cent p.a. MSCI European of award vests) p.a. (100 per cent of Transportation (large award vests) and mid-cap) index (one-third) Adjusted earnings per 2018 EPS of 105 2018 EPS of 145 117.7 €cents 39 per cent share (EPS) €cents (10 per cent of €cents (100 per cent (one-third) award vests) of award vests) Return on Invested 2018 RoIC of 12 per 2018 RoIC of 15 per 16.6 per cent 100 per cent Capital (RoIC) cent (10 per cent of cent (100 per cent of (one-third) award vests) award vests) Details of any discretion exercised Overall outcome 46.19 per cent

IAG PSP award 2015 The IAG PSP award granted on May 28, 2015 was tested at the end of the performance period which began on January 1, 2015 and ended on December 31, 2017. The awards were equivalent to 200 per cent of salary for the Chief Executive Officer of IAG and 120 per cent of salary for the Chief Financial Officer of IAG. One-third of the award was subject to a TSR performance condition measured against an index, one-third subject to achievement of the Company’s adjusted EPS targets (as defined above in the 2016 award), and one-third subject to a RoIC performance condition. The vesting of any award was subject to the Board being satisfied that the Group’s underlying financial performance was satisfactory in the circumstances prevailing over the three-year period. The outcome of the performance condition was as follows: Vesting (as per cent award Measure Threshold Maximum Outcome granted in 2015) TSR performance compared to the IAG’s TSR IAG’s TSR IAG underperformed 0 per cent TSR performance of the MSCI performance equal performance the index by 4 per European Transportation (large to the index (25 per exceeds index by 8 cent p.a. and mid-cap) cent of award vests) per cent p.a. (100 index (one-third) per cent of award vests) Adjusted earnings per share (EPS) 2017 EPS of 70 2017 EPS of 100 102.8 €cents 100 per cent (one-third) €cents (10 per cent €cents (100 per cent of award vests) of award vests) Return on Invested Capital (RoIC) 2017 RoIC of 12 per 2017 RoIC of 15 per 16.0 per cent 100 per cent (one-third) cent (10 per cent of cent (100 per cent of award vests) award vests) Details of any discretion exercised Overall outcome 66.67 per cent

106 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Scheme interests awarded during the financial year Subject to audit The IAG PSP is a discretionary plan targeted at key senior Group executives and managers who directly influence shareholder value. The Company granted an award under the PSP on May 10, 2018. The table in this section sets out the key details of the award. The Committee believes that comparing the Company’s TSR to that of European transportation companies, including airlines, is appropriate, given that these companies are subject to external influences impacting share price performance similar to those of the Group. This comparison therefore provides a good reference point for management outperformance and value creation. Financial Statements Earnings per share reflect the profitability of our business and the core elements of value creation for our shareholders. Growing earnings indicates that the Group is on the right path to create value for our shareholders. The Company uses rolling Return on Invested Capital (RoIC) as a profitability indicator to assess efficient return on the Group’s asset base. It quantifies how well the airlines generate cash flow in relation to the capital invested in their businesses together with their ability to fund growth and to pay dividends. PSP 2018 – eligibility, metrics and targets Type of award Shares Basis of determination of the Awards only made to those executives who are consistently high-performing, and/or are in size of award key roles, and/or whom the Company wishes to retain in the long term. Additional Information Face value awarded CEO of IAG – 200 per cent Other executive directors – 150 per cent (per cent of salary) Grant price £6.91 Performance period January 1, 2018 to December 31, 2020 Performance conditions Adjusted EPS performance RoIC performance targets TSR performance compared targets to the TSR performance of the MSCI European Transportation (large and mid-cap) index Weighting One-third One-third One-third Threshold 2020 EPS of 130 €cents 2020 RoIC of 13 per cent IAG’s TSR performance equal 10 per cent vests 10 per cent vests to the index 25 per cent vests Target 2020 EPS between 130 €cents 2020 RoIC between 13 per IAG’s TSR performance and 170 €cents cent and 16 per cent between index return and 8 (straight line vesting between (straight line vesting between per cent p.a. outperformance threshold and maximum) threshold and maximum) (straight line vesting between threshold and maximum) Maximum 2020 EPS of 170 €cents 2020 RoIC of 16 per cent IAG’s TSR performance 100 per cent vests 100 per cent vests exceeds index by 8 per cent p.a. 100 per cent vests Holding period Additional period of two years after the performance period

Adjusted EPS measure is as defined for the 2016 PSP award earlier in the report. The Board, after considering the recommendation of the Remuneration Committee, retains the discretion to review and, if appropriate, revise the EPS targets and/or definition in the context of any corporate transactions, provided that, in its view, any revised targets are no more or less challenging than the original targets. To the extent that any such adjustments are made, the Committee will disclose the basis for any adjustments and the rationale in subsequent reports.

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Total pension entitlements Subject to audit Willie Walsh is not a member of the Company’s pension scheme, and the Company therefore did not pay any contributions during the reporting period (2017: zero). He received cash in lieu of contributions of £212,500 (2017: £212,500). Enrique Dupuy de Lôme is not a member of the Company’s pension scheme, and the Company therefore did not pay any contributions during the reporting period (2017: zero). He received cash in lieu of contributions of £139,250 (2017: £136,750). Payments for loss of office No executive directors have left office during 2018. There were no payments made to non-executive directors after they left office during 2018. Payments to past directors José Pedro Pérez-Llorca received travel benefits worth €6,920 during 2018 after he had left the Company. Baroness Kingsmill received travel benefits worth €15,001 during 2018 after she had left the Company. James Lawrence received travel benefits worth €10,536 during 2018 after he had left the Company. Statement of voting The table below shows the consultative vote on the 2017 annual Directors’ Remuneration Report at the 2018 annual Shareholders’ Meeting, and the binding vote on the Directors’ Remuneration Policy at the 2018 annual Shareholders’ Meeting: Number of votes cast For Against Abstentions/Blank 2017 Annual Directors’ 1,463,865,426 1,391,707,784 8,644,928 63,512,714 Remuneration Report (95.070 per cent) (0.591 per cent) (4.339 per cent) Directors’ 1,463,865,426 1,396,029,011 13,091,180 54,745,235 Remuneration Policy (95.366 per cent) (0.894 per cent) (3.740 per cent)

Statement of directors’ shareholding and share interests Subject to audit In order that their interests are aligned with those of shareholders, each executive director is required to build up and maintain a minimum personal shareholding in the Company. Under the Group’s shareholding guidelines, the CEO of IAG is required to build up and maintain a shareholding of 350 per cent of salary. Other executive directors are required to build up and maintain shareholdings of 200 per cent of salary. In addition, they are required to retain the entire 100 per cent of shares (net of tax) which vest from share plans until their respective shareholding requirement is attained. The Committee has reviewed executive directors’ progress against the requirements and notes that both executive directors are well above the shareholding requirement. There has been a significant improvement in shareholding for the executive directors over the past five years, as a result of PSP awards vesting, and deferred shares awards from annual incentive plans. Interests in share awards following departure can enable departing directors to remain aligned with the interests of shareholders for an extended period after leaving the Company. For good leavers, share awards will not vest early on departure except in certain circumstances (for example on death). Deferred annual incentive awards and PSP awards will normally vest (and be released from their holding periods) at the normal time. This means that directors may retain a significant interest in shares for up to 5 years following departure from the Company. Shares which count towards the guideline include shares already held by the executive, vested and exercised shares, vested and unexercised shares including those in the performance share plan holding period, and unvested deferred annual incentive shares. The table below summarises current executive directors’ interests as of December 31, 2018: Shares already vested, or in the Shares already Unvested shares holding period, from vested from from deferred Shareholding performance deferred annual annual Total qualifying Executive director requirement Shares owned share plans incentive plans incentive plans shareholding Willie Walsh 350 per cent of 72,000 1,671,971 296,226 154,697 2,194,894 salary (1,257 per cent of salary) Enrique Dupuy 200 per cent of 100 492,007 109,760 63,432 665,299 de Lôme salary (644 per cent of salary)

108 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

External non-executive directorship The Nominations Committee's consent is required before an executive director can accept an external non-executive appointment. During the reporting period in question no executive director held a directorship from which they retained a fee. Until December 31, 2018, Willie Walsh was a non-executive director of the Irish National Treasury Management Agency, for which he has declined a fee. Enrique Dupuy de Lôme is Chairman of Iberia Cards. Non-executive directors Non-executive directors are paid a flat fee each year. The Non-Executive Chairman’s fee is €645,000. Other non-executive directors have a fee of €120,000. The additional fee for holding a Committee chairmanship is €20,000, and the additional fee for discharging the functions of Senior Independent Director is €30,000. Financial Statements In relation to the Chairman, as set out in the British Airways and Iberia merger documentation, the conditions of the service contract with Iberia were taken into account at the time of the merger. This means that he will therefore continue to be entitled to a lump-sum retirement benefit in an amount of €2,800,000. The fund balance under the policy (including accrued interest) will be paid upon exit from the Company for any reason. Directors’ interests in shares Subject to audit Total shares Percentage and voting rights of capital

Antonio Vázquez 512,291 0.026 Additional Information Willie Walsh 1,930,985 0.097 Marc Bolland 0 0.000 Patrick Cescau 0 0.000 Enrique Dupuy de Lôme 562,165 0.028 Deborah Kerr 0 0.000 María Fernanda Mejía 100 0.000 Kieran Poynter 15,000 0.001 Emilio Saracho 0 0.000 Dame Marjorie Scardino 100 0.000 Nicola Shaw 1,517 0.000 Alberto Terol 26,537 0.001 Total 3,048,695 0.153

There have been no changes to the shareholdings set out above between December 31, 2018 and the date of this report. Share scheme dilution limits The Investment Association sets guidelines that restrict the issue of new shares under all the Company’s share schemes in any ten-year period to 10 per cent of the issued ordinary share capital and restrict the issues under the Company’s discretionary schemes to 5 per cent in any ten-year period. At the annual Shareholders’ Meeting on June 18, 2015 the Company was given authority to allocate up to 67,500,000 shares (3.31 per cent of the share capital) in 2015, 2016, 2017 and 2018. Of this a maximum of 7,650,000 shares could be allocated to executive directors under all IAG share plans for awards made during 2015, 2016, 2017 and 2018. At December 31, 2018, 3.17 per cent of the share capital had been allocated under the IAG share plans. The highest and lowest closing prices of the Company’s shares during the period and the share price at December 31, 2018 were: At December 31 2018 618p Highest in the period 727p Lowest in the period 557p

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Company performance graph and Chief Executive Officer of IAG ‘single figure’ table The chart shows the value by December 31, 2018 of a hypothetical £100 invested in IAG shares on listing compared with the same amount invested in the FTSE 100 index over the same period. A spot share price has been taken on the date of listing, and a three-month average has been taken prior to the year ends. The FTSE 100 was selected because it is a broad equity index of which the Company is a constituent, and the index is widely recognised. IAG’s total shareholder return (TSR) performance compared to the FTSE 100

300

250

200

150

100

50 0 Jan 2011 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018

IAG FTSE 100

The table below shows the CEO ‘single total figure’ of remuneration for each year since the creation of IAG in January 2011: CEO of IAG – ‘total single figure’ of remuneration Annual incentive Long-term incentive 2011 £1,550,000 Includes annual incentive payment of Includes £251,594 value of long-term £302,000 (18 per cent of maximum). incentives vesting (35 per cent of maximum). 2012 £1,083,000 No annual incentive payment. Zero vesting of long-term incentives. 2013 £4,971,000 Includes annual incentive payment of Includes £2,593,569 value of long-term £1,299,375 (78.75 per cent of maximum). incentives vesting (100 per cent of maximum). 2014 £6,390,000 Includes annual incentive payment of Includes £3,640,135 value of long-term £1,662,222 (97.78 per cent of maximum). incentives vesting (85 per cent of maximum). 2015 £6,455,000 Includes annual incentive payment of Includes £4,405,185 value of long-term £1,360,000 (80 per cent of maximum). incentives vesting (100 per cent of maximum). 2016 £2,462,000 Includes annual incentive payment of Includes £807,741 value of long-term £566,667 (33.33 per cent of maximum). incentives vesting (50 per cent of maximum). 2017 £3,954,000 Includes annual incentive payment of Includes £1,285,819 value of long-term £1,579,583 (92.92 per cent of maximum). incentives vesting (66.67 per cent of maximum). 2018 £3,030,000 Includes annual incentive payment of Includes £888,605 value of long-term £1,051,450 (61.85 per cent of maximum). incentives vesting (46.19 per cent of maximum).

Single total figure of remuneration includes basic salary, taxable benefits, pension related benefits, annual incentive award and long-term incentive vesting. 2011 figure includes 20 days of remuneration in January 2011 paid by British Airways.

110 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Percentage change in remuneration of the Chief Executive Officer of IAG compared to employees The table below shows how the remuneration of the Chief Executive Officer of IAG has changed for 2018 compared to 2017. This is then compared to a group of appropriate employees. It has been determined that the most appropriate group of employees is all UK employees in the Group, comprising around 40,000 employees in total. To make the comparison between the CEO of IAG and employees as meaningful as possible, it was determined that as large a group as possible of employees should be chosen. The selection of all UK employees in the Group (roughly two-thirds of the entire Group’s employees) meets these criteria. The majority of the 40,000 UK employees in the Group are employed by British Airways, but there are also a number of employees Financial Statements from all other companies in the Group based in the UK. It was determined that employees outside the UK would not be considered for the comparison, as very different employment market conditions exist in other countries. Chief Executive Officer of IAG UK employees Basic salary No basic salary increase for 2018. Basic salary awards in 2018 at UK companies in the Group varied from around 2 per cent to 4.1 per cent. Annual Decrease from £1,579,583 in March 2018 (covering the Changes in overall annual incentive payments for 2018 incentive 2017 performance period) to £1,051,450 in March 2019 versus 2017 varied considerably around the Group, (covering the 2018 performance period). This depending on the incentive design, financial represents a 33 per cent decrease. performance, and non-financial performance at each individual company. Additional Information Taxable No change in benefits policy. No change in benefits policy. benefits Actual payments increased to £27,000 in 2018 from Overall costs 2018 versus 2017 increased very slightly in £25,000 in 2017. line with inflation.

Relative importance of spend on pay The table below shows, for 2018 and 2017, total remuneration costs, operating profit and dividends for the Company.

2018 2017 Total employee costs, IAG €4,812,000,000 €4,740,000,000 Total remuneration, directors €7,279,000 €8,744,000 (including non-executive directors) IAG operating profit €3,230,000,000 €3,015,000,000 (before exceptional items) Dividend declared €288,000,000 €550,000,000 Dividend proposed €1,027,000,000 –

Total employee costs are before exceptional items. CEO pay ratio Following UK Government changes to reporting regulations, IAG has voluntarily chosen to disclose the median pay ratio a year early. The table below shows the ratio of pay between the CEO of IAG and IAG’s UK employees. The CEO of IAG remuneration is the 2018 ‘single figure’ total remuneration, and this is compared to the median 2018 total remuneration of full-time equivalent UK employees in IAG. The Government’s methodology “A” has been used to calculate the remuneration. The data for the UK employees is from the payroll records of 35,559 UK employees who were in the Group for the whole of 2018, approximately 98 per cent of the UK employee total. It is recognised that this is not aligned with the new regulations for this first year of voluntary disclosure, but from when the regulations formally start on January 1, 2019 we will be in a position to be able to fully report this from next year's report onwards. Percentile CEO of IAG pay ratio 50th (Median) 60:1

www.iairgroup.com 111 REPORT OF THE REMUNERATION COMMITTEE CONTINUED

Implementation of remuneration policy for 2019 Basic salary Basic salaries for executive directors are reviewed from January 1 each year. After careful consideration of Company affordability, the worth of each executive, retention risks and the size of pay increases generally across the Group for 2019 (which varied across the Group from 2.0 per cent to 3.0 per cent), the Board, following the recommendation of the Remuneration Committee, approved the following: Executive director Basic salary review Chief Executive Officer of IAG £850,000 (€962,000) (no increase from 2018). Chief Financial Officer of IAG £570,000 (€645,000) (in UK sterling terms, an increase of 2.3% from 2018).

The Remuneration Committee recommended the Board to offer the Chief Executive a salary increase in line with that applied to other executives, however it was respectfully declined by him. 2019 annual incentive plan For 2019, the maximum award for the Chief Executive Officer of IAG will be 200 per cent of salary and for the Chief Financial Officer of IAG 150 per cent of salary. The weighting for the IAG operating profit (before exceptional items) measure will be 60 per cent, and for role-specific objectives will be 25 per cent. The remaining 15 per cent weighting will be for the Net Promoter Score (NPS) measure. The Board, after considering the recommendation of the Committee, has approved a stretching target range for IAG operating profit and NPS for 2019 at the threshold, on-target and maximum levels. At threshold, there will be a zero pay-out, 50 per cent of the maximum will pay out at the on-target level, and 100 per cent of the maximum will pay out at the stretch target level. There will be a straight line sliding scale between threshold and on-target, and on-target and the stretch target. For commercial reasons, the target range for IAG operating profit will not be disclosed until after the end of the performance year. It will be disclosed in next year’s Remuneration Report. 2019 Performance Share Plan award The Board, on the Committee’s recommendation, has approved a PSP award for 2019, with a performance period of January 1, 2019 to December 31, 2021. For 2019, the face value of awards for the Chief Executive Officer will be 200 per cent of salary and for the Chief Financial Officer 150 per cent of salary. The Board has approved the use of three performance conditions, each with a one-third weighting. These are the same three performance conditions and weightings that have been used since 2015. The reasons for the Board considering these measures to be appropriate are the same reasons as those mentioned for the 2018 PSP award earlier in the report. The first is based on IAG TSR performance relative to the MSCI European Transportation Index. The target range is identical to 2018, and is outlined earlier in this report. The second performance condition is based on adjusted EPS (as defined in the 2016 award). The Board and the Committee have agreed that the adjusted earnings per share (EPS) target range for the 2019 PSP award will be increased compared to the 2018 PSP award. The adjusted EPS measure will be as follows: Weighting One-third Threshold 2021 adjusted EPS of 150 €cents 10 per cent vests Target range (straight line vesting between threshold and maximum) 2021 adjusted EPS between 150 €cents and 190 €cents Maximum 2021 adjusted EPS of 190 €cents 100 per cent vests

The third performance condition is RoIC. The target range has been increased at the bottom end. The measure will be as follows: Weighting One-third Threshold 2021 RoIC of 14 per cent 10 per cent vests Target range (straight line vesting between threshold and maximum) 2021 RoIC between 14 per cent and 16 per cent Maximum 2021 RoIC of 16 per cent 100 per cent vests

There will be an additional holding period of two years. This means that executives will be required to retain the shares for a minimum of two years following the end of the performance period. This is to strengthen the alignment between executives and shareholders.

112 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance

Taxable benefits and pension related benefits Taxable benefits remain unchanged for 2019. Pension related benefits as a percentage of basic salary will decrease for new externally recruited executive directors as stated in the Remuneration Policy. Non-executive director fees Non-executive director fees were last reviewed in 2017 and remain unchanged for 2019. The fees have remained unchanged since 2011. Supplementary information

Directors’ share options Financial Statements The following directors held nil-cost options over ordinary shares of the Company granted under the IAG PSP. Number of Options Options Number of options at exercised Options granted options at Date January 1, Exercise during the lapsed during during the Exercisable December 31, Director of grant 2018 price year the year year from Expiry date 2018 Executive directors Willie Walsh May 28, 309,091 – – 103,031 – January 1, December 206,060 2015 2020 31, 2024 March 7, 314,233 – – – – January 1, December 314,233

2016 2021 31, 2025 Additional Information March 6, 311,355 – – – – January 1, December 311,355 2017 2022 31, 2026 May 10, – – – – 246,020 January 1, December 246,020 2018 2023 31, 2027 Total 934,679 – – 103,031 246,020 1,077,668 Enrique Dupuy de Lôme May 28, 112,364 – – 37,455 – January 1, December 74,909 2015 2020 31, 2024 March 7, 145,647 – – – – January 1, December 145,647 2016 2021 31, 2025 March 6, 147,198 – – – – January 1, December 147,198 2017 2022 31, 2026 May 10, – – – – 118,741 January 1, December 118,741 2018 2023 31, 2027 Total 405,209 – – 37,455 118,741 486,495

The award granted on May 28, 2015 was tested at the end of the performance period, and as a result 66.67 per cent of the award vested, as detailed earlier in this report in the section on Variable pay outcomes. The performance conditions for each of the other PSP awards listed above will be tested to determine the level of vesting. For each of these awards, one-third of the award is subject to TSR performance measured against an index, one-third is subject to adjusted EPS performance, and one-third is subject to RoIC performance. The performance conditions will be measured over a single three-year performance period. For each of these awards, following the performance period there is an additional holding period of two years. The value attributed to the Company’s ordinary shares in accordance with the plan rules on the dates of the PSP awards were as follows: 2018: 691 pence; 2017: 546 pence; 2016: 541 pence; and 2015: 550 pence.

www.iairgroup.com 113 REPORT OF THE REMUNERATION COMMITTEE CONTINUED

Incentive Award Deferral Plan The following directors held conditional awards over ordinary shares of the Company granted under the IAG IADP (awarded as a result of IAG performance for the periods that ended December 31, 2014, December 31, 2015, December 31, 2016, and December 31, 2017). Relates to incentive award Awards Awards Number of earned in Number of Awards lapsing made awards at respect of Date of awards at released during during the during the December 31, Director performance award January 1, 2018 the year Date of vesting year year 2018 Executive directors Willie Walsh 2014 May 28, 2015 151,111 151,111 March 8, 2018 – – – 2015 March 7, 2016 125,693 – March 7, 2019 – – 125,693 2016 March 6, 2017 51,893 – March 6, 2020 – – 51,893 2017 May 10, 2018 – – March 8, 2021 – 114,297 114,297 Total 328,697 151,111 – 114,297 291,883 Enrique Dupuy 2014 May 28, 2015 50,252 50,252 March 8, 2018 – – – de Lôme 2015 March 7, 2016 44,665 – March 7, 2019 – – 44,665 2016 March 6, 2017 22,080 – March 6, 2020 – – 22,080 2017 May 10, 2018 – – March 8, 2021 – 52,939 52,939 Total 116,997 50,252 – 52,939 119,684

There are no performance conditions to be tested before vesting for the IADP, except that the director must still be employed by the Company at the time of vesting, or have left as a Good Leaver. The value attributed to the Company’s ordinary shares in accordance with the plan rules on the date of the 2018 IADP award was 691 pence (2017: 546 pence; 2016: 541 pence; and 2015: 550 pence). The value attributed to the Company’s ordinary shares in accordance with the plan rules on the date of the 2015 IADP award was 550 pence. The share price on the date of the vesting of this award (March 8, 2018) was 629 pence. The money value of the shares received was the share price on the date of the vesting multiplied by the number of shares in respect of the award vested, as shown in the table above.

114 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 FINANCIAL STATEMENTS Strategic Report

Financial Statements 116 Consolidated income statement 117 Consolidated statement of other comprehensive income Corporate Governance 118 Consolidated balance sheet 119 Consolidated cash flow statement 120 Consolidated statement of changes in equity 122 Notes to the consolidated financial statements 172 Group investments Financial Statements Additional Information

The Group’s consolidated statements which follow have been prepared in accordance with the International Financial Reporting Standards as endorsed by the European Union.

www.iairgroup.com 115 CONSOLIDATED INCOME STATEMENT

Year to December 31 Before Before exceptional exceptional items Total items Exceptional Total 2017 Exceptional 2017 € million Note 2018 items 2018 (restated)1 items (restated)1 Passenger revenue 21,549 21,549 20,285 20,285 Cargo revenue 1,173 1,173 1,132 1,132 Other revenue 1,684 1,684 1,463 1,463 Total revenue 3 24,406 24,406 22,880 22,880 Employee costs 4, 7 4,812 (460) 4,352 4,740 248 4,988 Fuel, oil costs and emissions charges 5,283 5,283 4,610 4,610 Handling, catering and other operating costs 4 2,888 2,888 2,673 14 2,687 Landing fees and en-route charges 2,184 2,184 2,151 2,151 Engineering and other aircraft costs 4 1,828 1,828 1,773 19 1,792 Property, IT and other costs 4 918 12 930 915 7 922 Selling costs 1,046 1,046 982 982 Depreciation, amortisation and impairment 5 1,254 1,254 1,184 1,184 Aircraft operating lease costs 5 890 890 888 888 Currency differences 73 73 14 14 Total expenditure on operations 21,176 (448) 20,728 19,930 288 20,218 Operating profit 3 3,230 448 3,678 2,950 (288) 2,662

Finance costs 8 (231) (231) (225) (225) Finance income 8 41 41 45 45 Net financing credit/(charge) relating to pensions 8 27 27 (28) (28) Net currency retranslation (charges)/credits (19) (19) 38 38 Other non-operating charges 8 (9) (9) (11) (11) Total net non-operating costs (191) (191) (181) (181) Profit before tax 3,039 448 3,487 2,769 (288) 2,481 Tax 9 (558) (32) (590) (538) 66 (472) Profit after tax for the year 2,481 416 2,897 2,231 (222) 2,009

Attributable to: Equity holders of the parent 2,469 2,885 2,211 1,989 Non-controlling interest 12 12 20 20 2,481 2,897 2,231 2,009

Basic earnings per share (€ cents) 10 122.1 142.7 105.9 95.2 Diluted earnings per share (€ cents) 10 117.7 137.4 102.2 92.0

1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33.

116 116 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

Year to December 31 Year to December 31 Strategic Report Before 2017 Before exceptional € million Note 2018 (restated)1 items Total exceptional Items that may be reclassified subsequently to net profit items Exceptional Total 2017 Exceptional 2017 € million Note 2018 items 2018 (restated)1 items (restated)1 Cash flow hedges: Passenger revenue 21,549 21,549 20,285 20,285 Fair value movements in equity 29 (517) 101 Cargo revenue 1,173 1,173 1,132 1,132 Reclassified and reported in net profit 29 (480) 28 Other revenue 1,684 1,684 1,463 1,463 Fair value movements on cost of hedging 13 (41)

Total revenue 3 24,406 24,406 22,880 22,880 Corporate Governance Employee costs 4, 7 4,812 (460) 4,352 4,740 248 4,988 Currency translation differences 29 (80) (127) Fuel, oil costs and emissions charges 5,283 5,283 4,610 4,610 Handling, catering and other operating Items that will not be reclassified to net profit costs 4 2,888 2,888 2,673 14 2,687 Fair value movements on other equity investments (5) 9 Landing fees and en-route charges 2,184 2,184 2,151 2,151 Fair value movements on cash flow hedges 26 – Engineering and other aircraft costs 4 1,828 1,828 1,773 19 1,792 Remeasurements of post-employment benefit obligations 29 (696) 739 Property, IT and other costs 4 918 12 930 915 7 922 Total other comprehensive (loss)/income for the year, net of tax (1,739) 709 Selling costs 1,046 1,046 982 982 Profit after tax for the year 2,897 2,009 Depreciation, amortisation and impairment 5 1,254 1,254 1,184 1,184 Total comprehensive income for the year 1,158 2,718 Financial Statements Aircraft operating lease costs 5 888 888 890 890 Currency differences 14 14 73 73 Total comprehensive income is attributable to: Total expenditure on operations 19,930 288 20,218 21,176 (448) 20,728 Equity holders of the parent 1,146 2,698 Operating profit 3 3,230 448 3,678 2,950 (288) 2,662 Non-controlling interest 29 12 20 1,158 2,718 Finance costs 8 (231) (231) (225) (225) 1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33. Finance income 8 41 41 45 45 Net financing credit/(charge) relating Items in the consolidated Statement of other comprehensive income above are disclosed net of tax. to pensions 8 27 27 (28) (28) Additional Information Net currency retranslation (charges)/credits (19) (19) 38 38 Other non-operating charges 8 (9) (9) (11) (11) Total net non-operating costs (191) (191) (181) (181) Profit before tax 3,039 448 3,487 2,769 (288) 2,481 Tax 9 (558) (32) (590) (538) 66 (472) Profit after tax for the year 2,481 416 2,897 2,231 (222) 2,009

Attributable to: Equity holders of the parent 2,469 2,885 2,211 1,989 Non-controlling interest 12 12 20 20 2,481 2,897 2,231 2,009

Basic earnings per share (€ cents) 10 122.1 142.7 105.9 95.2 Diluted earnings per share (€ cents) 10 117.7 137.4 102.2 92.0

1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33.

116 117 www.iairgroup.com 117 CONSOLIDATED BALANCE SHEET

December 31, January 1, December 31, 2017 2017 € million Note 2018 (restated)1 (restated)1 Non-current assets Property, plant and equipment 12 12,437 11,846 12,227 Intangible assets 14 3,198 3,018 3,037 Investments accounted for using the equity method 15 31 30 29 Other equity investments 16 80 79 73 Employee benefit assets 30 1,129 1,023 1,028 Derivative financial instruments 26 221 145 169 Deferred tax assets 9 536 523 561 Other non-current assets 17 309 376 499 17,941 17,040 17,623 Current assets Non-current assets held for sale – – 38 Inventories 509 432 458 Trade receivables 17 1,597 1,463 1,370 Other current assets 17 1,175 958 899 Current tax receivable 9 383 258 228 Derivative financial instruments 26 155 405 329 Other current interest-bearing deposits 18 2,437 3,384 3,091 Cash and cash equivalents 18 3,837 3,292 3,337 10,093 10,192 9,750 Total assets 28,034 27,232 27,373

Shareholders’ equity Issued share capital 27 996 1,029 1,066 Share premium 27 6,022 6,022 6,105 Treasury shares 27 (68) (77) (96) Other reserves 29 (236) (348) (2,149) Total shareholders’ equity 6,714 6,626 4,926 Non-controlling interest 29 6 307 308 Total equity 6,720 6,933 5,234 Non-current liabilities Interest-bearing long-term borrowings 22 6,633 6,401 7,589 Employee benefit obligations 30 289 792 2,363 Deferred tax liability 9 453 526 110 Provisions for liabilities and charges 24 2,268 2,113 1,987 Derivative financial instruments 26 423 114 20 Other long-term liabilities 21 198 222 238 10,264 10,168 12,307 Current liabilities Current portion of long-term borrowings 22 876 930 926 Trade and other payables 19 3,959 3,723 3,266 Deferred revenue on ticket sales 20 4,835 4,742 4,680 Derivative financial instruments 26 656 111 88 Current tax payable 9 165 78 101 Provisions for liabilities and charges 24 559 547 771 11,050 10,131 9,832 Total liabilities 21,314 20,299 22,139 Total equity and liabilities 28,034 27,232 27,373 1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33.

118 118 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 CONSOLIDATED BALANCE SHEET CONSOLIDATED CASH FLOW STATEMENT

December 31, January 1, Year to December 31 Strategic Report December 31, 2017 2017 2017 1 1 € million Note 2018 (restated) (restated) € million Note 2018 (restated)1 Non-current assets Cash flows from operating activities Property, plant and equipment 12 12,437 11,846 12,227 Operating profit after exceptional items 3,678 2,662 Intangible assets 14 3,198 3,018 3,037 Depreciation, amortisation and impairment 5 1,254 1,184 Investments accounted for using the equity method 15 31 30 29 Movement in working capital (64) 647 Other equity investments 16 80 79 73 Increase in trade receivables, prepayments, inventories and other current assets (650) (287) Employee benefit assets 30 1,129 1,023 1,028

Increase in trade and other payables, deferred revenue on ticket sales and current Corporate Governance Derivative financial instruments 26 221 145 169 liabilities 586 934 Deferred tax assets 9 536 523 561 Payments related to restructuring 24 (220) (248) Other non-current assets 17 309 376 499 Employer contributions to pension schemes2 30 (898) (899) 17,941 17,040 17,623 Pension scheme service costs 30 55 233 Current assets Provision and other non-cash movements (114) 264 Non-current assets held for sale – – 38 Interest paid (149) (122) Inventories 509 432 458 Interest received 37 29 Trade receivables 17 1,597 1,463 1,370 Tax paid (343) (237) Other current assets 17 1,175 958 899 Net cash flows from operating activities 3,236 3,513 Current tax receivable 9 383 258 228 Financial Statements Derivative financial instruments 26 155 405 329 Cash flows from investing activities Other current interest-bearing deposits 18 2,437 3,384 3,091 Acquisition of property, plant and equipment and intangible assets (2,802) (1,490) Cash and cash equivalents 18 3,837 3,292 3,337 Sale of property, plant and equipment and intangible assets 574 306 10,093 10,192 9,750 Proceeds from sale of investments – 17 Total assets 28,034 27,232 27,373 Decrease/(increase) in other current interest-bearing deposits 924 (432) Other investing movements 61 55 Shareholders’ equity Net cash flows from investing activities (1,243) (1,544) Issued share capital 27 996 1,029 1,066

Share premium 27 6,022 6,022 6,105 Cash flows from financing activities Additional Information Treasury shares 27 (68) (77) (96) Proceeds from long-term borrowings 1,078 178 Other reserves 29 (236) (348) (2,149) Repayment of borrowings (275) (148) Total shareholders’ equity 6,714 6,626 4,926 Repayment of finance leases (824) (825) Non-controlling interest 29 6 307 308 Acquisition of treasury shares (500) (500) Total equity 6,720 6,933 5,234 Distributions made to holders of perpetual securities (312) (21) Non-current liabilities Dividend paid (577) (512) Interest-bearing long-term borrowings 22 6,633 6,401 7,589 Net cash flows from financing activities (1,410) (1,828) Employee benefit obligations 30 289 792 2,363 Deferred tax liability 9 453 526 110 Net increase in cash and cash equivalents 583 141 Provisions for liabilities and charges 24 2,268 2,113 1,987 Net foreign exchange differences (38) (186) Derivative financial instruments 26 423 114 20 Cash and cash equivalents at 1 January 3,292 3,337 Other long-term liabilities 21 198 222 238 Cash and cash equivalents at year end 18 3,837 3,292 10,264 10,168 12,307 Current liabilities Interest-bearing deposits maturing after more than three months 18 2,437 3,384 Current portion of long-term borrowings 22 876 930 926 Trade and other payables 19 3,959 3,723 3,266 Cash, cash equivalents and other interest-bearing deposits 18 6,274 6,676

Deferred revenue on ticket sales 20 4,835 4,742 4,680 1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33. Derivative financial instruments 26 656 111 88 2 Includes transitional arrangement cash costs associated with changes to the British Airways pension schemes; refer to note 4. Current tax payable 9 165 78 101 Provisions for liabilities and charges 24 559 547 771 11,050 10,131 9,832 Total liabilities 21,314 20,299 22,139 Total equity and liabilities 28,034 27,232 27,373 1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’; refer to note 33.

118 119 www.iairgroup.com 119 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year to December 31, 2018

Issued Non- share Share Treasury Other Total controlling capital premium shares reserves Retained shareholders’ interest Total € million (note 27) (note 27) (note 27) (note 29) earnings equity (note 29) equity January 1, 2018 (restated) 1,029 6,022 (77) (2,626) 2,278 6,626 307 6,933

Profit for the year – – – – 2,885 2,885 12 2,897

Other comprehensive income for the year Cash flow hedges reclassified and reported in net profit: Passenger revenue – – – 77 – 77 – 77 Fuel and oil costs – – – (565) – (565) – (565) Currency differences – – – 4 – 4 – 4 Finance costs – – – 4 – 4 – 4 Net change in fair value of cash flow hedges – – – (491) – (491) – (491) Net change in fair value of equity investments – – – (5) – (5) – (5) Net change in fair value of cost of hedging – – – 13 – 13 – 13 Currency translation differences – – – (80) – (80) – (80) Remeasurements of post- employment benefit obligations – – – – (696) (696) – (696) Total comprehensive income for the year – – – (1,043) 2,189 1,146 12 1,158

Hedges reclassified and reported in property, plant and equipment – – – (1) – (1) – (1) Cost of share-based payments – – – – 31 31 – 31 Vesting of share-based payment schemes – – 9 – (15) (6) – (6) Acquisition of treasury shares – – (500) – – (500) – (500) Dividend – – – – (582) (582) – (582) Cancellation of share capital (33) – 500 33 (500) – – – Dividend of a subsidiary – – – – – – (1) (1) Transfer between reserves – – – 77 (77) – – – Distributions made to holders of perpetual securities – – – – – – (312) (312) December 31, 2018 996 6,022 (68) (3,560) 3,324 6,714 6 6,720

120 120 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year to December 31, 2018 For the year to December 31, 2017

Issued Non- Issued Non- Strategic Report share Share Treasury Other Total controlling share Share Treasury Other Total controlling capital premium shares reserves Retained shareholders’ interest Total capital premium shares reserves Retained shareholders’ interest Total € million (note 27) (note 27) (note 27) (note 29) earnings equity (note 29) equity € million (note 27) (note 27) (note 27) (note 29) earnings equity (note 29) equity January 1, 2018 (restated) 1,029 6,022 (77) (2,626) 2,278 6,626 307 6,933 January 1, 2017 1,066 6,105 (96) (2,671) 952 5,356 308 5,664 Restatement for adoption of new Profit for the year – – – – 2,885 2,885 12 2,897 standards – – – 38 (468) (430) – (430)

Other comprehensive income for the January 1, 2017 (restated) 1,066 6,105 (96) (2,633) 484 4,926 308 5,234 year Profit for the year – – – – 1,989 1,989 20 2,009 Corporate Governance Cash flow hedges reclassified and reported in net profit: Other comprehensive income for Passenger revenue – – – 77 – 77 – 77 the year Fuel and oil costs – – – (565) – (565) – (565) Cash flow hedges reclassified and Currency differences – – – 4 – 4 – 4 reported in net profit: Finance costs – – – 4 – 4 – 4 Passenger revenue – – – 84 – 84 – 84 Net change in fair value of cash flow Fuel and oil costs – – – (38) – (38) – (38) hedges – – – (491) – (491) – (491) Currency differences – – – (18) – (18) – (18) Net change in fair value of equity Net change in fair value of cash flow investments – – – (5) – (5) – (5) hedges – – – 101 – 101 – 101 Financial Statements Net change in fair value of cost of Net change in fair value of equity hedging – – – 13 – 13 – 13 investments – – – 9 – 9 – 9 Currency translation differences – – – (80) – (80) – (80) Net change in fair value of cost of Remeasurements of post- hedging – – – (41) – (41) – (41) employment benefit obligations – – – – (696) (696) – (696) Currency translation differences – – – (127) – (127) – (127) Total comprehensive income for Remeasurements of post- the year – – – (1,043) 2,189 1,146 12 1,158 employment benefit obligations – – – – 739 739 – 739 Total comprehensive income for Hedges reclassified and reported in the year – – – (30) 2,728 2,698 20 2,718 property, plant and equipment – – – (1) – (1) – (1) Additional Information Cost of share-based payments – – – – 31 31 – 31 Cost of share-based payments – – – – 34 34 – 34 Vesting of share-based payment Vesting of share-based payment schemes – – 9 – (15) (6) – (6) schemes – – 19 – (33) (14) – (14) Acquisition of treasury shares – – (500) – – (500) – (500) Acquisition of treasury shares – – (500) – – (500) – (500) Dividend – – – – (582) (582) – (582) Dividend – – – – (518) (518) – (518) Cancellation of share capital (33) – 500 33 (500) – – – Cancellation of share capital (37) – 500 37 (500) – – – Dividend of a subsidiary – – – – – – (1) (1) Dividend of a subsidiary – – – – – – (1) (1) Transfer between reserves – – – 77 (77) – – – Transfer between reserves – (83) – – 83 – – – Distributions made to holders of Distributions made to holders of perpetual securities – – – – – – (312) (312) perpetual securities – – – – – – (20) (20) December 31, 2018 996 6,022 (68) (3,560) 3,324 6,714 6 6,720 December 31, 2017 1,029 6,022 (77) (2,626) 2,278 6,626 307 6,933

120 121 www.iairgroup.com 121 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year to December 31, 2018

1 Background and general information International Consolidated Airlines Group S.A. (hereinafter ‘International Airlines Group’, ‘IAG’ or the ‘Group’) is a leading European airline group, formed to hold the interests of airline and ancillary operations. IAG is a Spanish company registered in Madrid and was incorporated on April 8, 2010. On January 21, 2011 British Airways Plc and Iberia Líneas Aéreas de España S.A. Operadora (hereinafter ‘British Airways’ and ‘Iberia’ respectively) completed a merger transaction becoming the first two airlines of the Group. Vueling Airlines S.A. (‘Vueling’) was acquired on April 26, 2013, and Aer Lingus Group Plc (‘Aer Lingus’) on August 18, 2015. A list of the subsidiaries of the Group is included in the Group investments section. IAG shares are traded on the London Stock Exchange’s main market for listed securities and also on the stock exchanges of Madrid, Barcelona, Bilbao and Valencia (the ‘Spanish Stock Exchanges’), through the Spanish Stock Exchanges Interconnection System (Mercado Continuo Español).

2 Significant accounting policies Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards as endorsed by the European Union (IFRSs as endorsed by the EU). The consolidated financial statements are rounded to the nearest million unless otherwise stated. These financial statements have been prepared on a historical cost convention except for certain financial assets and liabilities, including derivative financial instruments and other equity investments that are measured at fair value. The carrying value of recognised assets and liabilities that are subject to fair value hedges are adjusted to record changes in the fair values attributable to the risks that are being hedged. In order to improve the presentation of the Income statement, certain non-operating items have been aggregated into a new line, ‘Other non-operating (charges)/credits’, with further analysis provided in note 8 to the accounts. The Group’s financial statements for the year to December 31, 2018 were authorised for issue, and approved by the Board of Directors on February 27, 2019. The Directors have considered the business activities, the Group’s principal risks and uncertainties, and the Group’s financial position, including cash flows, liquidity position and available committed facilities. The Directors consider that the Group has adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the financial statements. Consolidation The Group financial statements include the financial statements of the Company and its subsidiaries, each made up to December 31, together with the attributable share of results and reserves of associates and joint ventures, adjusted where appropriate to conform to the Group’s accounting policies. Subsidiaries are consolidated from the date of their acquisition, which is the date on which the Group obtains control and continue to be consolidated until the date that such control ceases. Control exists when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Group applies the acquisition method to account for business combinations. The consideration paid is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Non-controlling interests represent the portion of profit or loss and net assets in subsidiaries that are not held by the Group and are presented separately within equity in the consolidated Balance sheet. Acquisition-related costs are expensed as incurred. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the Income statement. Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling interest over the net identifiable assets acquired and liabilities assumed. All intra-group account balances, including intra-group profits, are eliminated in preparing the consolidated financial statements. Segmental reporting Operating segments are reported in a manner consistent with how resource allocation decisions are made by the chief operating decision-maker. The chief operating decision-maker, who is responsible for resource allocation and assessing performance of the operating segments, has been identified as the IAG Management Committee. Foreign currency translation a Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the functional currency, being the currency of the primary economic environment in which the entity operates. In particular, British Airways and Avios have a functional currency of pound sterling. The Group’s consolidated financial statements are presented in euros, which is the Group’s presentation currency.

122 122 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year to December 31, 2018

1 Background and general information b Transactions and balances Strategic Report International Consolidated Airlines Group S.A. (hereinafter ‘International Airlines Group’, ‘IAG’ or the ‘Group’) is a leading European Transactions in foreign currencies are initially recorded in the functional currency using the rate of exchange prevailing on the date airline group, formed to hold the interests of airline and ancillary operations. IAG is a Spanish company registered in Madrid and of the transaction. Monetary foreign currency balances are translated into the functional currency at the rates ruling at the balance was incorporated on April 8, 2010. On January 21, 2011 British Airways Plc and Iberia Líneas Aéreas de España S.A. Operadora sheet date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at (hereinafter ‘British Airways’ and ‘Iberia’ respectively) completed a merger transaction becoming the first two airlines of the Group. balance sheet exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Vueling Airlines S.A. (‘Vueling’) was acquired on April 26, 2013, and Aer Lingus Group Plc (‘Aer Lingus’) on August 18, 2015. A list of statement, except where hedge accounting is applied. Foreign exchange gains and losses arising on the retranslation of monetary the subsidiaries of the Group is included in the Group investments section. assets and liabilities classified as non-current on the Balance sheet are recognised within ‘Net currency retranslation (charges)/ credits’ in the Income statement. All other gains and losses arising on the retranslation of monetary assets and liabilities are IAG shares are traded on the London Stock Exchange’s main market for listed securities and also on the stock exchanges of recognised in operating profit.

Madrid, Barcelona, Bilbao and Valencia (the ‘Spanish Stock Exchanges’), through the Spanish Stock Exchanges Interconnection Corporate Governance System (Mercado Continuo Español). c Group companies The net assets of foreign operations are translated into euros at the rate of exchange ruling at the balance sheet date. Profits 2 Significant accounting policies and losses of such operations are translated into euros at average rates of exchange during the year. The resulting exchange differences are taken directly to a separate component of equity (Currency translation reserve) until all or part of the interest Basis of preparation is sold, when the relevant portion of the cumulative exchange difference is recognised in the Income statement. The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Property, plant and equipment Standards as endorsed by the European Union (IFRSs as endorsed by the EU). The consolidated financial statements are rounded to the nearest million unless otherwise stated. These financial statements have been prepared on a historical cost convention Property, plant and equipment is held at cost. The Group has a policy of not revaluing property, plant and equipment. Depreciation except for certain financial assets and liabilities, including derivative financial instruments and other equity investments that are is calculated to write off the cost less the estimated residual value on a straight-line basis, over the economic life of the asset. measured at fair value. The carrying value of recognised assets and liabilities that are subject to fair value hedges are adjusted to Residual values, where applicable, are reviewed annually against prevailing market values for equivalently aged assets and record changes in the fair values attributable to the risks that are being hedged. In order to improve the presentation of the Income depreciation rates adjusted accordingly on a prospective basis. Financial Statements statement, certain non-operating items have been aggregated into a new line, ‘Other non-operating (charges)/credits’, with further a Capitalisation of interest on progress payments analysis provided in note 8 to the accounts. Interest attributed to progress payments made on account of aircraft and other qualifying assets under construction are The Group’s financial statements for the year to December 31, 2018 were authorised for issue, and approved by the Board of capitalised and added to the cost of the asset concerned. All other borrowing costs are recognised in the Income statement in the Directors on February 27, 2019. year in which they are incurred. The Directors have considered the business activities, the Group’s principal risks and uncertainties, and the Group’s financial b Fleet position, including cash flows, liquidity position and available committed facilities. The Directors consider that the Group has All aircraft are stated at the fair value of the consideration given after taking account of manufacturers’ credits. Fleet assets owned adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern or held on finance leases are disaggregated into separate components and depreciated at rates calculated to write down the cost basis in preparing the financial statements. of each component to the estimated residual value at the end of their planned operational lives (which is the shorter of their useful Consolidation life or lease term) on a straight-line basis. Depreciation rates are specific to aircraft type, based on the Group’s fleet plans, within

overall parameters of 23 years and 5 per cent residual value for shorthaul aircraft and 25 years and 5 per cent residual value for Additional Information The Group financial statements include the financial statements of the Company and its subsidiaries, each made up to December longhaul aircraft. 31, together with the attributable share of results and reserves of associates and joint ventures, adjusted where appropriate to conform to the Group’s accounting policies. Cabin interior modifications, including those required for brand changes and relaunches, are depreciated over the lower of five years and the remaining economic life of the aircraft. Subsidiaries are consolidated from the date of their acquisition, which is the date on which the Group obtains control and continue to be consolidated until the date that such control ceases. Control exists when the Group is exposed to, or has rights to, variable Aircraft and engine spares acquired on the introduction or expansion of a fleet, as well as rotable spares purchased separately, returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. are carried as property, plant and equipment and generally depreciated in line with the fleet to which they relate. The Group applies the acquisition method to account for business combinations. The consideration paid is the fair value of the Major overhaul expenditure, including replacement spares and labour costs, is capitalised and amortised over the average assets transferred, the liabilities incurred and the equity interests issued by the Group. Identifiable assets acquired and liabilities expected life between major overhauls. All other replacement spares and other costs relating to maintenance of fleet assets assumed in a business combination are measured initially at their fair values at the acquisition date. Non-controlling interests (including maintenance provided under ‘pay-as-you-go’ contracts) are charged to the Income statement on consumption represent the portion of profit or loss and net assets in subsidiaries that are not held by the Group and are presented separately or as incurred respectively. within equity in the consolidated Balance sheet. Acquisition-related costs are expensed as incurred. c Other property, plant and equipment If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in Provision is made for the depreciation of all property, plant and equipment. Property, with the exception of freehold land, is the acquiree is remeasured to fair value at the acquisition date through the Income statement. depreciated over its expected useful life over periods not exceeding 50 years, or in the case of leasehold properties, over the Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling duration of the lease if shorter, on a straight-line basis. Equipment is depreciated over periods ranging from 4 to 20 years. interest over the net identifiable assets acquired and liabilities assumed. d Leased assets All intra-group account balances, including intra-group profits, are eliminated in preparing the consolidated financial statements. Where assets are financed through finance leases, under which substantially all the risks and rewards of ownership are transferred to the Group, the assets are treated as if they had been purchased outright. The amount included in the cost of property, plant and Segmental reporting equipment represents the aggregate of the capital elements payable during the lease term. The corresponding obligation, reduced Operating segments are reported in a manner consistent with how resource allocation decisions are made by the chief operating by the appropriate proportion of lease payments made, is included in borrowings. decision-maker. The chief operating decision-maker, who is responsible for resource allocation and assessing performance of the operating segments, has been identified as the IAG Management Committee. The amount included in the cost of property, plant and equipment is depreciated on the basis described in the preceding paragraphs on fleet and the interest element of lease payments made is included as an interest expense in the Income statement. Foreign currency translation Total minimum payments, measured at inception, under all other lease arrangements, known as operating leases, are charged a Functional and presentation currency to the Income statement in equal annual amounts over the period of the lease. In respect of aircraft, certain operating lease Items included in the financial statements of each of the Group’s entities are measured using the functional currency, being the arrangements allow the Group to terminate the leases after a limited initial period, without further material financial obligations. currency of the primary economic environment in which the entity operates. In particular, British Airways and Avios have a In certain cases the Group is entitled to extend the initial lease period on predetermined terms; such leases are described as functional currency of pound sterling. The Group’s consolidated financial statements are presented in euros, which is the Group’s extendable operating leases. presentation currency. In determining the appropriate lease classification, the substance of the transaction rather than the form is considered. Factors considered include but are not limited to the following: whether the lease transfers ownership of the asset to the lessee by the end of the lease term; the lessee has the option to purchase the asset at the price that is sufficiently lower than the fair value on exercise date; the lease term is for the major part of the economic life of the asset; and the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.

122 123 www.iairgroup.com 123 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

2 Significant accounting policies continued Intangible assets a Goodwill Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the consideration paid over the net fair value of the identifiable assets and liabilities of the acquiree. Where the net fair value of the identifiable assets and liabilities of the acquiree is in excess of the consideration paid, a gain on bargain purchase is recognised immediately in the Income statement. For the purpose of assessing impairment, goodwill is grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Goodwill is tested for impairment annually and whenever indicators exist that the carrying value may not be recoverable. b Brands Brands arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date. Long established brands that are expected to be used indefinitely are not amortised but assessed annually for impairment. c Customer loyalty programmes Customer loyalty programmes arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date. A customer loyalty programme with an expected useful life is amortised over the expected remaining useful life. Established customer loyalty programmes that are expected to be used indefinitely are not amortised but assessed annually for impairment. d Landing rights Landing rights acquired in a business combination are recognised at fair value at the acquisition date. Landing rights acquired from other airlines are capitalised at cost. Capitalised landing rights based outside the EU are amortised on a straight-line basis over a period not exceeding 20 years. Capitalised landing rights based within the EU are not amortised, as regulations provide that these landing rights are perpetual. e Contract based intangibles Contract based intangibles acquired in a business combination are recognised initially at fair value at the acquisition date and amortised over the remaining life of the contract. f Software The cost to purchase or develop computer software that is separable from an item of related hardware is capitalised separately and amortised on a straight-line basis generally over a period not exceeding five years, with certain specific software developments amortised over a period of up to 10 years. g Emissions allowances Purchased emissions allowances are recognised at cost. Emissions allowances are not revalued or amortised but are tested for impairment whenever indicators exist that the carrying value may not be recoverable. Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the value by which the asset’s carrying value exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value-in-use. Non-financial assets other than goodwill that were subject to an impairment are reviewed for possible reversal of the impairment at each reporting date. a Property, plant and equipment The carrying value is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable and the cumulative impairment losses are shown as a reduction in the carrying value of property, plant and equipment. b Intangible assets Intangible assets are held at cost and are either amortised on a straight-line basis over their economic life, or they are deemed to have an indefinite economic life and are not amortised. Indefinite life intangible assets are tested annually for impairment or more frequently if events or changes in circumstances indicate the carrying value may not be recoverable. Investments in associates and joint ventures An associate is an undertaking in which the Group has a long-term equity interest and over which it has the power to exercise significant influence. Where the Group cannot exercise control over an entity in which it has a shareholding greater than 51 per cent, the equity interest is treated as an associated undertaking. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. Investments in associates and joint ventures are accounted for using the equity method, and initially recognised at cost. The Group’s interest in the net assets of associates and joint ventures is included in Investments accounted for using the equity method in the Balance sheet and its interest in their results is included in the Income statement, below operating result. The attributable results of those companies acquired or disposed of during the year are included for the periods of ownership.

124 124 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

Financial instruments 2 Significant accounting policies continued Strategic Report Intangible assets a Other equity investments Other equity investments are non-derivative financial assets including listed and unlisted investments, excluding interests in a Goodwill associates and joint ventures. On initial recognition, these equity investments are irrevocably designated as measured at fair value Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the consideration through Other comprehensive income. They are subsequently measured at fair value, with changes in fair value recognised in paid over the net fair value of the identifiable assets and liabilities of the acquiree. Where the net fair value of the identifiable assets Other comprehensive income with no recycling of these gains and losses to the Income statement when the investment is sold. and liabilities of the acquiree is in excess of the consideration paid, a gain on bargain purchase is recognised immediately in the Dividends received on other equity investments are recognised in the Income statement. Income statement. The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet date.

For the purpose of assessing impairment, goodwill is grouped at the lowest levels for which there are separately identifiable cash Where there is no active market, fair value is determined using valuation techniques. Corporate Governance flows (cash generating units). Goodwill is tested for impairment annually and whenever indicators exist that the carrying value may not be recoverable. b Other interest-bearing deposits Other interest-bearing deposits, principally comprising funds held with banks and other financial institutions with contractual b Brands cash flows that are solely payments of principal and interest, are carried at amortised cost using the effective interest method. Brands arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date. Long established brands that are expected to be used indefinitely are not amortised but assessed annually for impairment. c Derivative financial instruments and hedging activities Derivative financial instruments, comprising interest rate swap agreements, foreign exchange derivatives and fuel hedging c Customer loyalty programmes derivatives (including options, swaps and futures) are initially recognised at fair value on the date a derivative contract is entered Customer loyalty programmes arising on the acquisition of subsidiaries are initially recognised at fair value at the acquisition date. into and are subsequently remeasured at their fair value. They are classified as financial instruments through profit and loss. The A customer loyalty programme with an expected useful life is amortised over the expected remaining useful life. Established method of recognising the resulting gain or loss arising from remeasurement depends on whether the derivative is designated as a customer loyalty programmes that are expected to be used indefinitely are not amortised but assessed annually for impairment. hedging instrument, and if so, the nature of the item being hedged (as detailed below under cash flow hedges). The time value of

options is excluded from the designated hedging instrument and accounted for as a cost of hedging. Movements in the time value Financial Statements d Landing rights of options are recognised in Other comprehensive income until the underlying transaction affects the income statement. Landing rights acquired in a business combination are recognised at fair value at the acquisition date. Landing rights acquired from other airlines are capitalised at cost. Exchange gains and losses on monetary investments are taken to the Income statement unless the item has been designated and is assessed as an effective hedging instrument. Exchange gains and losses on non-monetary investments are reflected in equity. Capitalised landing rights based outside the EU are amortised on a straight-line basis over a period not exceeding 20 years. Capitalised landing rights based within the EU are not amortised, as regulations provide that these landing rights are perpetual. Long-term borrowings are recorded at amortised cost, including leases which contain interest rate swaps that are closely related to the underlying financing and as such are not accounted for as an embedded derivative. e Contract based intangibles Contract based intangibles acquired in a business combination are recognised initially at fair value at the acquisition date and d Cash flow hedges amortised over the remaining life of the contract. Changes in the fair value of derivative financial instruments designated as a hedge of a highly probable expected future cash flow and assessed as effective are recorded in equity. Gains and losses on derivative instruments not designated as a cash flow hedge f Software are reported in the Income statement. Gains and losses recorded in equity are reflected in the Income statement when either the Additional Information The cost to purchase or develop computer software that is separable from an item of related hardware is capitalised separately hedged cash flow impacts the Income statement or the hedged item is no longer expected to occur. and amortised on a straight-line basis generally over a period not exceeding five years, with certain specific software developments amortised over a period of up to 10 years. Certain loan repayment instalments denominated in US dollars, euros, Japanese yen and Chinese yuan are designated as cash flow hedges of highly probable future foreign currency revenues. Exchange differences arising from the translation of these loan g Emissions allowances repayment instalments are recorded in equity and subsequently reflected in the Income statement when either the future revenue Purchased emissions allowances are recognised at cost. Emissions allowances are not revalued or amortised but are tested for impacts income or its occurrence is no longer expected to occur. impairment whenever indicators exist that the carrying value may not be recoverable. e Convertible debt Impairment of non-financial assets Convertible bonds are classified as compound instruments, consisting of a liability and an equity component. At the date of issue, Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt, and subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying is subsequently recorded at an amortised cost basis using the effective interest method until extinguished on conversion or amount may not be recoverable. An impairment loss is recognised for the value by which the asset’s carrying value exceeds its maturity of the bonds, and is recognised within Interest-bearing borrowings. The difference between the proceeds of issue of the recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value-in-use. Non-financial convertible bond and the fair value assigned to the liability component, representing the embedded option to convert the liability assets other than goodwill that were subject to an impairment are reviewed for possible reversal of the impairment at each into equity of the Group, is included in Equity portion of convertible bond in Other reserves and is not subsequently remeasured. reporting date. Issue costs are apportioned between the liability and equity components of the convertible bonds where appropriate based on a Property, plant and equipment their relative carrying values at the date of issue. The portion relating to the equity component is charged directly against equity. The carrying value is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be The interest expense on the liability component is calculated by applying the effective interest rate for similar non-convertible recoverable and the cumulative impairment losses are shown as a reduction in the carrying value of property, plant and equipment. debt to the liability component of the instrument. The difference between this value and the interest paid is added to the carrying amount of the liability. b Intangible assets Intangible assets are held at cost and are either amortised on a straight-line basis over their economic life, or they are deemed to f Impairment of financial assets have an indefinite economic life and are not amortised. Indefinite life intangible assets are tested annually for impairment or more At each balance sheet date, the Group recognises provisions for expected credit losses on financial assets measured at amortised frequently if events or changes in circumstances indicate the carrying value may not be recoverable. cost, based on 12-month or lifetime losses depending on whether there has been a significant increase in credit risk since initial recognition. The simplified approach, based on the calculation and recognition of lifetime expected credit losses, is applied to Investments in associates and joint ventures contracts that have a maturity of one year or less, including trade receivables. An associate is an undertaking in which the Group has a long-term equity interest and over which it has the power to exercise significant influence. Where the Group cannot exercise control over an entity in which it has a shareholding greater than 51 per cent, the equity interest is treated as an associated undertaking. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. Investments in associates and joint ventures are accounted for using the equity method, and initially recognised at cost. The Group’s interest in the net assets of associates and joint ventures is included in Investments accounted for using the equity method in the Balance sheet and its interest in their results is included in the Income statement, below operating result. The attributable results of those companies acquired or disposed of during the year are included for the periods of ownership.

124 125 www.iairgroup.com 125 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

2 Significant accounting policies continued Employee benefit plans a Pension obligations The Group has both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior years. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years. The benefit is discounted to determine its present value, and the fair value of any plan assets are deducted. The discount rate is the yield at the balance sheet date on AA-rated corporate bonds of the appropriate currency that have durations approximating those of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the net obligation calculation results in an asset for the Group, the recognition of an asset is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan (‘the asset ceiling’). The fair value of the plan assets is based on market price information and, in the case of quoted securities, is the published bid price. The fair value of insurance policies which exactly match the amount and timing of some or all benefits payable under the scheme are deemed to be the present value of the related obligations. Longevity swaps are measured at their fair value. Current service costs are recognised within employee costs in the year in which they arise. Past service costs are recognised in the event of a plan amendment or curtailment, or when the Group recognises related restructuring costs or severance obligations. The net interest is calculated by applying the discount rate used to measure the defined benefit obligation at the beginning of the period to the net defined benefit liability or asset, taking into account any changes in the net defined benefit liability or asset during the period as a result of contributions and benefit payments. Net interest and other expenses related to the defined benefit plans are recognised in the Income statement. Remeasurements, comprising actuarial gains and losses, the effect of the asset ceiling (excluding interest) and the return on plan assets (excluding interest), are recognised immediately in Other comprehensive income. Remeasurements are not reclassified to the Income statement in subsequent periods. b Severance obligations Severance obligations are recognised when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises a provision for severance payments when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without realistic possibility of withdrawal, or providing severance payments as a result of an offer made to encourage voluntary redundancy. Other employee benefits are recognised when there is deemed to be a present obligation. Taxation Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted at the balance sheet date. Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions: • where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; • in respect of taxable temporary differences associated with investments in subsidiaries or associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and • deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise income tax is recognised in the Income statement.

126 126 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

Inventories 2 Significant accounting policies continued Strategic Report Inventories are valued at the lower of cost and net realisable value. Such cost is determined by the weighted average cost method. Employee benefit plans Inventories include mainly aircraft spare parts, repairable aircraft engine parts and fuel. a Pension obligations Cash and cash equivalents The Group has both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which Cash and cash equivalents include cash in hand and deposits with any qualifying financial institution repayable on demand or the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further maturing within three months of the date of acquisition and which are subject to an insignificant risk of change in value. contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior years. Share-based payments The Group operates a number of equity-settled, share-based payment plans, under which the Group awards equity instruments of Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent Corporate Governance on one or more factors such as age, years of service and compensation. the Group for services rendered by employees. The fair value of the share-based payment plans is measured at the date of grant using a valuation model provided by external specialists. The resulting cost, as adjusted for the expected and actual level of vesting The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the of the plan, is charged to the Income statement over the period in which the options vest. At each balance sheet date before amount of future benefit that employees have earned in return for their service in the current and prior years. The benefit is vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s discounted to determine its present value, and the fair value of any plan assets are deducted. The discount rate is the yield at the best estimate of the achievement or otherwise of non-market conditions, and accordingly the number of equity instruments that balance sheet date on AA-rated corporate bonds of the appropriate currency that have durations approximating those of the will ultimately vest. The movement in the cumulative expense since the previous balance sheet date is recognised in the Income Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the net statement with a corresponding entry in equity. obligation calculation results in an asset for the Group, the recognition of an asset is limited to the present value of any future refunds from the plan or reductions in future contributions to the plan (‘the asset ceiling’). The fair value of the plan assets is based Provisions on market price information and, in the case of quoted securities, is the published bid price. The fair value of insurance policies Provisions are made when an obligation exists for a present liability in respect of a past event and where the amount of the which exactly match the amount and timing of some or all benefits payable under the scheme are deemed to be the present value obligation can be reliably estimated. of the related obligations. Longevity swaps are measured at their fair value. Employee leaving indemnities and other employee provisions are recorded for flight crew who, meeting certain conditions, Financial Statements Current service costs are recognised within employee costs in the year in which they arise. Past service costs are recognised in have the option of being placed on reserve or of taking early retirement. The Group is obligated to remunerate these employees the event of a plan amendment or curtailment, or when the Group recognises related restructuring costs or severance obligations. until they reach the statutory retirement age. The calculation is performed by independent actuaries using the projected unit The net interest is calculated by applying the discount rate used to measure the defined benefit obligation at the beginning of the credit method. period to the net defined benefit liability or asset, taking into account any changes in the net defined benefit liability or asset during the period as a result of contributions and benefit payments. Net interest and other expenses related to the defined benefit plans Other employee related provisions are recognised for direct expenditures of business reorganisation such as severance payments are recognised in the Income statement. Remeasurements, comprising actuarial gains and losses, the effect of the asset ceiling (restructuring provisions) where plans are sufficiently detailed and well advanced, and where appropriate communication to those (excluding interest) and the return on plan assets (excluding interest), are recognised immediately in Other comprehensive income. affected has been undertaken at the balance sheet date. Remeasurements are not reclassified to the Income statement in subsequent periods. If the effect is material, expected future cash flows are discounted using a rate that reflects, where appropriate, the risks specific to the provision. Where discounting is used, the increase in the provision due to unwinding the discount is recognised as a b Severance obligations finance cost. Severance obligations are recognised when employment is terminated by the Group before the normal retirement date, or Additional Information whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises a provision for Revenue recognition severance payments when it is demonstrably committed to either terminating the employment of current employees according The Group’s revenue primarily derives from transportation services for both passengers and cargo. Revenue is recognised when to a detailed formal plan without realistic possibility of withdrawal, or providing severance payments as a result of an offer made the transportation service has been provided. Passenger tickets are generally paid for in advance of transportation and are to encourage voluntary redundancy. recognised, net of discounts, as deferred revenue on ticket sales in current liabilities until the customer has flown. Unused tickets Other employee benefits are recognised when there is deemed to be a present obligation. are recognised as revenue after the contracted date of departure using estimates regarding the timing of recognition based on the terms and conditions of the ticket and statistical analysis of historical trends. Taxation The Group considers whether it is an agent or a principal in relation to transportation services by considering whether it has a Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation performance obligation to provide services to the customer or whether the obligation is to arrange for the services to be provided authorities, based on tax rates and laws that are enacted or substantively enacted at the balance sheet date. by a third party. Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their Other revenue including maintenance; handling; hotel and holiday and commissions is recognised as the related performance carrying amounts in the financial statements, with the following exceptions: obligation is satisfied (over time) using an appropriate methodology which reflects the activity that has been undertaken to satisfy • where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is the related obligation. not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; Customer loyalty programmes in respect of taxable temporary differences associated with investments in subsidiaries or associates, where the timing of the • The Group’s main loyalty programmes are Executive Club, Iberia Plus, Avios, Vueling Club and Aer Club. The customer loyalty reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the programmes award travellers Avios points to redeem for various rewards, primarily redemption travel, including flights, hotels and foreseeable future; and car hire. Avios points are also sold to commercial partners to use in loyalty activity. • deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. The Group has identified several performance obligations associated with the sale of Avios points. Revenue associated with brand and marketing services and revenue associated with Avios points has been determined based on the relative stand-alone selling Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply price of each of the performance obligations. Revenue associated with brand and marketing services is recognised as the points when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance are issued. Revenue allocated to the Avios points is deferred on the balance sheet as a current liability, and recognised when the sheet date. points are redeemed. When the points are redeemed for products provided by suppliers outside the Group, revenue is recognised Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise income in the Income statement net of related costs, as the Group is considered to be an agent in these redemption transactions. tax is recognised in the Income statement. The Group estimates the stand-alone selling price of the brand and marketing performance obligations by reference to the amount that a third party would be prepared to pay in an arm’s length transaction for access to comparable brands for the period over which they have access. The stand-alone selling price of Avios points is based on the value of the awards for which the points could be redeemed. The Group also recognises revenue associated with the proportion of award credits which are not expected to be redeemed, based on the results of statistical modelling.

126 127 www.iairgroup.com 127 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

2 Significant accounting policies continued Exceptional items Exceptional items are those that in management’s view need to be separately disclosed by virtue of their size or incidence. The exceptional items recorded in the Income statement include items such as significant restructuring; the impact of business combination transactions that do not contribute to the ongoing results of the Group; and the impact of the sale, disposal or impairment of an investment in a business. Business combination transactions include cash items such as the costs incurred to effect the transaction and non-cash items such as accounting gains or losses recognised through the Income statement, such as bargain purchase gains and step acquisition losses. Critical accounting judgements, estimates and assumptions The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These judgements, estimates and associated assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances. Actual results in the future may differ from judgements and estimates upon which financial information has been prepared. These underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised prospectively. Estimates The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows. a Employee benefit obligations, employee leaving indemnities, other employee related restructuring provisions At December 31, 2018 the Group recognised €1,129 million in respect of employee benefit assets (2017: €1,023 million) and €289 million in respect of employee benefit obligations (2017: €792 million). Further information on employee benefit obligations is disclosed in note 30. The cost of employee benefit obligations, employee leaving indemnities and other employee related provisions is determined using actuarial valuations. Actuarial valuations involve making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these schemes, such assumptions are subject to significant uncertainty. The assumptions relating to these schemes are disclosed in notes 24 and 30. The Group determines the assumptions to be adopted in discussion with qualified actuaries. In respect of future pension increases in the Airways Pension Scheme, on July 5, 2018 the Court of Appeal released its judgement, upholding British Airways’ appeal, concluding the Trustee did not have the power to introduce a discretionary increase rule. Further information on these proceedings is disclosed in note 31. The sensitivity to changes in pension increase assumptions is disclosed in note 30. On October 26, 2018 the High Court of Justice of England and Wales issued a judgment in a claim between Lloyds Banking Group Pension Trustees Limited as claimant and Lloyds Bank plc and others as defendants regarding the rights of female members of certain pension schemes to equality of treatment in relation to pension benefits. The judgment affects some of the occupational pension schemes of the Group as set out in note 30. Whilst the Lloyds judgement has brought some clarity to the issue, there remains some uncertainty over how the calculation of the obligation for Guaranteed Minimum Pension (GMP) equalisation should be performed. The UK Government may also produce guidance on the application of GMP equalisation. In determining the obligation for these consolidated financial statements, the Group has assumed that the Trustees will adopt Method C2 which was identified in the Lloyds judgement as the ‘minimum interference’ method which could be implemented without sponsor agreement. The final cost of GMP equalisation will be determined when further guidance is available and may be higher or lower than the current estimate. Restructuring provisions are estimates of future obligations. The Group exercises judgement in determining the expected direct expenditures of reorganisation based on plans which are sufficiently detailed and advanced. b Revenue recognition At December 31, 2018 the Group recognised €4,835 million in respect of deferred revenue on ticket sales (2017: €4,742 million) of which €1,769 million (2017: €1,752 million) related to customer loyalty programmes. Passenger revenue is recognised when the transportation is provided. At the time of transportation, revenue is also recognised in respect of tickets that are not expected to be used (‘unused tickets’). Revenue associated with unused tickets is estimated based on the terms and conditions of the tickets and historical trends. Revenue associated with the issuance of points under customer loyalty programmes is based on the relative stand-alone selling prices of the related performance obligations (brand, marketing and points), determined using estimation techniques. The transaction price of brand and marketing services is determined using specific brand valuation methodologies. The transaction price of the points is based on the value of the awards for which the points can be redeemed and is reduced to take account of the proportion of the award credits that are not expected to be redeemed by customers. The Group estimates the number of points not expected to be redeemed (using statistical modelling and historical trends) and the mix and fair value of the award credits. A one percentage point change in the assumption of points not expected to be redeemed will result in an adjustment to deferred revenue of €100 million, with an offsetting adjustment to revenue and operating profit recognised in the year. The following three accounting estimates involve a higher degree of judgement or complexity, or are areas where assumptions are significant to the financial statements however these accounting estimates are not major sources of estimation uncertainty that have a significant risk of resulting in material adjustment to the carrying amounts of assets and liabilities within the next year.

128 128 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

c Income taxes 2 Significant accounting policies continued Strategic Report At December 31, 2018 the Group recognised €536 million in respect of deferred tax assets (2017: €523 million). Further information Exceptional items on current and deferred tax liabilities is disclosed in note 9. Exceptional items are those that in management’s view need to be separately disclosed by virtue of their size or incidence. The exceptional items recorded in the Income statement include items such as significant restructuring; the impact of business The Group is subject to income taxes in numerous jurisdictions. Estimates are required in determining the worldwide provision for combination transactions that do not contribute to the ongoing results of the Group; and the impact of the sale, disposal or income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain because it may impairment of an investment in a business. be unclear how tax law applies to a particular transaction or circumstance. The Group recognises liabilities for anticipated tax audit assessments. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such Business combination transactions include cash items such as the costs incurred to effect the transaction and non-cash items differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. such as accounting gains or losses recognised through the Income statement, such as bargain purchase gains and step acquisition losses. The Group recognises deferred income tax assets only to the extent that it is probable that the taxable profit will be available Corporate Governance against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Management consider Critical accounting judgements, estimates and assumptions the operating performance in the current year and the future projections of performance laid out in the approved Business plan in The preparation of financial statements requires management to make judgements, estimates and assumptions that affect order to assess the probability of recoverability. The Business plan relies on the use of assumptions, estimates and judgements in the application of policies and reported amounts of assets and liabilities, income and expenses. These judgements, estimates respect of future performance and economics. and associated assumptions are based on historical experience and various other factors believed to be reasonable under the d Impairment of non-financial assets circumstances. Actual results in the future may differ from judgements and estimates upon which financial information has been prepared. These underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are At December 31, 2018 the Group recognised €2,403 million in respect of intangible assets with an indefinite life, including goodwill recognised prospectively. (2017: €2,363 million). Further information on these assets is included in note 14. Estimates The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill and intangible assets with indefinite economic lives are tested for impairment annually and at other times when such indicators exist. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations and liabilities within the next financial year are as follows. Financial Statements require the use of estimates and assumptions as disclosed in note 14. a Employee benefit obligations, employee leaving indemnities, other employee related restructuring provisions Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. At December 31, 2018 the Group recognised €1,129 million in respect of employee benefit assets (2017: €1,023 million) and €289 million in respect of employee benefit obligations (2017: €792 million). Further information on employee benefit obligations e Residual values and useful lives of assets is disclosed in note 30. At December 31, 2018 the Group recognised €12,437 million in respect of property, plant and equipment (2017: €11,846 million). Further information on these assets is included in note 12. The cost of employee benefit obligations, employee leaving indemnities and other employee related provisions is determined using actuarial valuations. Actuarial valuations involve making assumptions about discount rates, expected rates of return on The Group estimates useful lives and residual values of property, plant and equipment, including fleet assets based on network assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these schemes, such plans and recoverable values. Useful lives and residual values are reassessed annually, taking into consideration the latest fleet assumptions are subject to significant uncertainty. The assumptions relating to these schemes are disclosed in notes 24 and 30. plans and other business plan information.

The Group determines the assumptions to be adopted in discussion with qualified actuaries. In respect of future pension increases Additional Information in the Airways Pension Scheme, on July 5, 2018 the Court of Appeal released its judgement, upholding British Airways’ appeal, Judgement concluding the Trustee did not have the power to introduce a discretionary increase rule. Further information on these Engineering and other aircraft costs proceedings is disclosed in note 31. The sensitivity to changes in pension increase assumptions is disclosed in note 30. At December 31, 2018, the Group recognised €1,359 million in respect of maintenance, restoration and handback provisions On October 26, 2018 the High Court of Justice of England and Wales issued a judgment in a claim between Lloyds Banking Group (2017: €1,125 million). Information on movements on the provision is disclosed in note 24. Pension Trustees Limited as claimant and Lloyds Bank plc and others as defendants regarding the rights of female members of The Group has a number of contracts with service providers to replace or repair engine parts and for other maintenance checks. certain pension schemes to equality of treatment in relation to pension benefits. The judgment affects some of the occupational These agreements are complex and generally cover a number of years. The Group exercises judgement in determining the pension schemes of the Group as set out in note 30. assumptions used to match the consumption of replacement spares and other costs associated with fleet maintenance with the Whilst the Lloyds judgement has brought some clarity to the issue, there remains some uncertainty over how the calculation of appropriate income statement charge. Aircraft maintenance obligations are based on aircraft utilisation, expected maintenance the obligation for Guaranteed Minimum Pension (GMP) equalisation should be performed. The UK Government may also produce intervals, future maintenance costs and the aircraft’s condition. guidance on the application of GMP equalisation. In determining the obligation for these consolidated financial statements, the Changes in accounting policy and disclosures Group has assumed that the Trustees will adopt Method C2 which was identified in the Lloyds judgement as the ‘minimum interference’ method which could be implemented without sponsor agreement. The final cost of GMP equalisation will be a New and amended standards adopted by the Group determined when further guidance is available and may be higher or lower than the current estimate. The Group has applied IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’ for the first time for the Restructuring provisions are estimates of future obligations. The Group exercises judgement in determining the expected direct year to December 31, 2018. Further details on the impact of these standards on the Group accounting policies and financial position expenditures of reorganisation based on plans which are sufficiently detailed and advanced. and performance are provided in note 33. b Revenue recognition Other amendments to accounting standards, adopted for the first time in the year to December 31, 2018 have not resulted in a significant change to the financial position or performance of the Group, or to presentation and disclosures in the Group At December 31, 2018 the Group recognised €4,835 million in respect of deferred revenue on ticket sales (2017: €4,742 million) financial statements. of which €1,769 million (2017: €1,752 million) related to customer loyalty programmes.

Passenger revenue is recognised when the transportation is provided. At the time of transportation, revenue is also recognised in respect of tickets that are not expected to be used (‘unused tickets’). Revenue associated with unused tickets is estimated based on the terms and conditions of the tickets and historical trends. Revenue associated with the issuance of points under customer loyalty programmes is based on the relative stand-alone selling prices of the related performance obligations (brand, marketing and points), determined using estimation techniques. The transaction price of brand and marketing services is determined using specific brand valuation methodologies. The transaction price of the points is based on the value of the awards for which the points can be redeemed and is reduced to take account of the proportion of the award credits that are not expected to be redeemed by customers. The Group estimates the number of points not expected to be redeemed (using statistical modelling and historical trends) and the mix and fair value of the award credits. A one percentage point change in the assumption of points not expected to be redeemed will result in an adjustment to deferred revenue of €100 million, with an offsetting adjustment to revenue and operating profit recognised in the year. The following three accounting estimates involve a higher degree of judgement or complexity, or are areas where assumptions are significant to the financial statements however these accounting estimates are not major sources of estimation uncertainty that have a significant risk of resulting in material adjustment to the carrying amounts of assets and liabilities within the next year.

128 129 www.iairgroup.com 129 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

2 Significant accounting policies continued b New standards, amendments and interpretations not yet effective The IASB issued IFRS 16 ‘Leases’ with an effective date after the year end of these financial statements. This standard will impact the Group from January 1, 2019. Further information on the requirements of the standard is provided in note 33. In addition the IASB’s Interpretations Committee has issued IFRIC Interpretation 23 ‘Uncertainty over tax treatments’; effective for periods beginning on or after January 1, 2019. The interpretation clarifies application of recognition and measurement requirements in IAS 12 ‘Income Taxes’ when there is uncertainty over income tax treatments. The Group has assessed the impact of the interpretation and it is not expected to have a material effect on the reported income or net assets of the Group. There are no other standards, amendments or interpretations in issue but not yet adopted that the Directors anticipate will have a material effect on the reported income or net assets of the Group. The Group has not early adopted any standard, amendment or interpretation that has been issued but is not yet effective.

3 Segment information a Business segments The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments, and has been identified as the IAG Management Committee (IAG MC). The Group has a number of entities which are managed as individual operating companies including airline and platform functions. Each airline operates its network operations as a single business unit and the IAG MC assesses performance based on measures including operating profit, and makes resource allocation decisions for the airlines based on network profitability, primarily by reference to the passenger markets in which the companies operate. The objective in making resource allocation decisions is to optimise consolidated financial results. The Group has determined its operating segments based on the way that it treats its businesses and the manner in which resource allocation decisions are made. British Airways, Iberia, Vueling and Aer Lingus have been identified for financial reporting purposes as reportable operating segments. Avios and LEVEL are also operating segments but do not exceed the quantitative thresholds to be reportable and management has concluded that there are currently no other reasons why they should be separately disclosed. The platform functions of the business primarily support the airline operations. These activities are not considered to be reportable operating segments as they either earn revenues incidental to the activities of the Group and resource allocation decisions are made based on the passenger business, or are not reviewed regularly by the IAG MC and are included within Other Group companies. For the year to December 31, 2018

2018 Other British Aer Group € million Airways Iberia Vueling Lingus companies1 Total Revenue Passenger revenue 12,972 3,765 2,377 1,952 483 21,549 Cargo revenue 867 251 – 54 1 1,173 Other revenue 682 749 20 9 224 1,684 External revenue 14,521 4,765 2,397 2,015 708 24,406 Inter-segment revenue 508 417 1 5 538 1,469 Segment revenue 15,029 5,182 2,398 2,020 1,246 25,875

Depreciation, amortisation and impairment (890) (207) (25) (83) (49) (1,254)

Operating profit before exceptional items 2,207 437 200 305 81 3,230 Exceptional items (note 4) 448 – – – – 448 Operating profit after exceptional items 2,655 437 200 305 81 3,678 Net non-operating costs (191) Profit before tax 3,487

Total assets 18,531 6,829 1,882 1,915 (1,123) 28,034 Total liabilities (12,235) (5,051) (1,495) (1,072) (1,461) (21,314) 1 Includes eliminations on total assets of €13,681 million and total liabilities of €3,667 million.

130 130 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

For the year to December 31, 2017 (restated) 2 Significant accounting policies continued Strategic Report 2017 b New standards, amendments and interpretations not yet effective Other The IASB issued IFRS 16 ‘Leases’ with an effective date after the year end of these financial statements. This standard will impact British Group the Group from January 1, 2019. Further information on the requirements of the standard is provided in note 33. € million Airways Iberia Vueling Aer Lingus companies1 Total In addition the IASB’s Interpretations Committee has issued IFRIC Interpretation 23 ‘Uncertainty over tax treatments’; effective for Revenue periods beginning on or after January 1, 2019. The interpretation clarifies application of recognition and measurement requirements Passenger revenue 12,470 3,554 2,104 1,797 360 20,285 in IAS 12 ‘Income Taxes’ when there is uncertainty over income tax treatments. The Group has assessed the impact of the Cargo revenue 843 242 – 47 – 1,132 interpretation and it is not expected to have a material effect on the reported income or net assets of the Group. Other revenue 589 644 23 11 196 1,463 Corporate Governance There are no other standards, amendments or interpretations in issue but not yet adopted that the Directors anticipate will have External revenue 13,902 4,440 2,127 1,855 556 22,880 a material effect on the reported income or net assets of the Group. Inter-segment revenue 482 420 – 2 459 1,363 The Group has not early adopted any standard, amendment or interpretation that has been issued but is not yet effective. Segment revenue 14,384 4,860 2,127 1,857 1,015 24,243

3 Segment information Depreciation, amortisation and impairment (860) (182) (20) (77) (45) (1,184) a Business segments Operating profit before exceptional items 1,992 376 188 268 126 2,950 The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments, Exceptional items (note 4) (108) (180) – – – (288) and has been identified as the IAG Management Committee (IAG MC). Operating profit after exceptional items 1,884 196 188 268 126 2,662 The Group has a number of entities which are managed as individual operating companies including airline and platform functions. Net non-operating costs (181) Financial Statements Each airline operates its network operations as a single business unit and the IAG MC assesses performance based on measures including operating profit, and makes resource allocation decisions for the airlines based on network profitability, primarily by Profit before tax 2,481 reference to the passenger markets in which the companies operate. The objective in making resource allocation decisions is to optimise consolidated financial results. The Group has determined its operating segments based on the way that it treats its businesses and the manner in which resource Total assets 18,872 6,079 1,515 1,976 (1,210) 27,232 allocation decisions are made. British Airways, Iberia, Vueling and Aer Lingus have been identified for financial reporting purposes Total liabilities (12,117) (4,358) (1,253) (1,055) (1,516) (20,299) as reportable operating segments. Avios and LEVEL are also operating segments but do not exceed the quantitative thresholds to 1 Includes eliminations on total assets of €13,031 million and total liabilities of €2,744 million. be reportable and management has concluded that there are currently no other reasons why they should be separately disclosed.

b Geographical analysis The platform functions of the business primarily support the airline operations. These activities are not considered to be

reportable operating segments as they either earn revenues incidental to the activities of the Group and resource allocation Revenue by area of original sale Additional Information decisions are made based on the passenger business, or are not reviewed regularly by the IAG MC and are included within Year to December 31 Other Group companies. 2017 € million 2018 (restated) For the year to December 31, 2018 UK 7,982 7,574 2018 Spain 4,064 3,551 Other British Aer Group USA 4,093 3,694 € million Airways Iberia Vueling Lingus companies1 Total Rest of world 8,267 8,061 Revenue 24,406 22,880 Passenger revenue 12,972 3,765 2,377 1,952 483 21,549 Assets by area Cargo revenue 867 251 – 54 1 1,173 December 31, 2018 Other revenue 682 749 20 9 224 1,684 External revenue 14,521 4,765 2,397 2,015 708 24,406 Property, plant and Intangible Inter-segment revenue 508 417 1 5 538 1,469 € million equipment assets Segment revenue 15,029 5,182 2,398 2,020 1,246 25,875 UK 9,017 1,285 Spain 2,512 1,291 Depreciation, amortisation and impairment (890) (207) (25) (83) (49) (1,254) USA 29 4 Rest of world 879 618 Operating profit before exceptional items 2,207 437 200 305 81 3,230 12,437 3,198 Exceptional items (note 4) 448 – – – – 448 December 31, 2017 Operating profit after exceptional items 2,655 437 200 305 81 3,678 Net non-operating costs (191) Property, plant and Intangible Profit before tax 3,487 € million equipment assets UK 9,013 1,171 Spain 2,050 1,241 Total assets 18,531 6,829 1,882 1,915 (1,123) 28,034 USA 18 6 Total liabilities (12,235) (5,051) (1,495) (1,072) (1,461) (21,314) Rest of world 765 600 1 Includes eliminations on total assets of €13,681 million and total liabilities of €3,667 million. 11,846 3,018

130 131 www.iairgroup.com 131 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

4 Exceptional items Year to December 31 € million 2018 2017 Restructuring costs1 136 288 Employee benefit obligations2 (584) – Recognised in expenditure on operations (448) 288 Total exceptional (credit)/charge before tax (448) 288 Tax on exceptional items 32 (66) Total exceptional (credit)/charge after tax (416) 222

1 Restructuring costs During 2018 British Airways continued to implement the restructuring programme that started in July 2016, to develop a more efficient and cost effective structure. The overall costs of the programme principally comprise employee severance costs and include other directly associated costs such as onerous lease provisions and asset write down costs. Costs incurred in the year to December 31, 2018 in respect of this programme amount to €136 million (2017: €108 million), with a related tax credit of €26 million (2017: €21 million). In the year to December 31, 2017, €180 million of restructuring costs were recognised at Iberia, related to the announcement of a new Transformation Plan. A related tax credit of €45 million was also recognised. 2 Employee benefit obligations British Airways closed its New Airways Pension Scheme (NAPS) to future accrual and British Airways Retirement Plan (BARP) to future contributions from March 31, 2018. The schemes have been replaced by a flexible defined contribution scheme, the British Airways Pension Plan (BAPP). The changes resulted in a one-off reduction of the NAPS IAS 19 defined benefit liability of €872 million and associated transitional arrangement cash costs of €192 million through employee costs. These items are presented net, together with BARP closure costs, as an exceptional credit within the Income Statement of €678 million, with a related tax charge of €58 million. On 26 October 2018, the High Court of Justice of England and Wales issued a judgement in a claim by Lloyds Banking Group Pension Trustees Limited as claimant to Lloyds Bank plc and others as defendants regarding the rights of female members of certain pension schemes to equality of treatment in relation to pension benefits. The judgement concluded that the claimant is under a duty to amend the schemes in order to equalise benefits for men and women in relation to Guaranteed Minimum Pension (GMP) benefits. The judgement affects some of the occupational pension schemes of British Airways as set out in note 30. The estimated increase in IAS 19 liabilities as a result of the High Court judgement has been recorded as an exceptional charge of €94 million.

5 Expenses by nature Operating profit is arrived at after charging Depreciation, amortisation and impairment of non-current assets:

€ million 2018 2017 Owned assets 711 641 Finance leased aircraft 371 382 Other leasehold interests 40 41 Amortisation of intangible assets 132 120 1,254 1,184

Operating leases costs:

€ million 2018 2017 Minimum lease rentals – aircraft 890 888 – property and equipment 236 224 Sub-lease rentals received (12) (1) 1,114 1,111

Cost of inventories:

€ million 2018 2017 Cost of inventories recognised as an expense, mainly fuel 3,165 3,176

132 132 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

4 Exceptional items 6 Auditors’ remuneration Strategic Report Year to December 31 The fees for audit and non-audit services provided by the auditor of the Group’s consolidated financial statements and of certain € million 2018 2017 individual financial statements of the consolidated companies, Ernst & Young S.L., and by companies belonging to Ernst & Young’s Restructuring costs1 136 288 network, were as follows: Employee benefit obligations2 (584) – €’000 2018 2017 Recognised in expenditure on operations (448) 288 Fees payable for the audit of the Group and individual accounts 4,328 3,648 Total exceptional (credit)/charge before tax (448) 288 Fees payable for other services: Tax on exceptional items 32 (66) Audit of the Group’s subsidiaries pursuant to legislation 569

634 Corporate Governance Total exceptional (credit)/charge after tax (416) 222 Other services pursuant to legislation 436 465 Other assurance services 506 467 1 Restructuring costs Services relating to corporate finance transactions 191 296 During 2018 British Airways continued to implement the restructuring programme that started in July 2016, to develop a more All other services 3 efficient and cost effective structure. The overall costs of the programme principally comprise employee severance costs and 305 include other directly associated costs such as onerous lease provisions and asset write down costs. Costs incurred in the year to 6,400 5,448 December 31, 2018 in respect of this programme amount to €136 million (2017: €108 million), with a related tax credit of €26 million The audit fees payable are approved by the Audit and Compliance Committee and have been reviewed in the context of other (2017: €21 million). companies for cost effectiveness. A description of the work of the Audit and Compliance Committee is set out in the Report of In the year to December 31, 2017, €180 million of restructuring costs were recognised at Iberia, related to the announcement of a the Audit and Compliance Committee and includes an explanation of how objectivity and independence is safeguarded when new Transformation Plan. A related tax credit of €45 million was also recognised. non-audit services are provided.

2 Employee benefit obligations Financial Statements British Airways closed its New Airways Pension Scheme (NAPS) to future accrual and British Airways Retirement Plan (BARP) 7 Employee costs and numbers to future contributions from March 31, 2018. The schemes have been replaced by a flexible defined contribution scheme, the € million 2018 2017 British Airways Pension Plan (BAPP). The changes resulted in a one-off reduction of the NAPS IAS 19 defined benefit liability Wages and salaries 3,240 3,155 of €872 million and associated transitional arrangement cash costs of €192 million through employee costs. These items are Social security costs 516 486 presented net, together with BARP closure costs, as an exceptional credit within the Income Statement of €678 million, with (Credits)/costs related to pension scheme benefits 370 a related tax charge of €58 million. (317) Other post-retirement benefit costs 5 – On 26 October 2018, the High Court of Justice of England and Wales issued a judgement in a claim by Lloyds Banking Group Cost of share-based payments 31 34 Pension Trustees Limited as claimant to Lloyds Bank plc and others as defendants regarding the rights of female members of 1 certain pension schemes to equality of treatment in relation to pension benefits. The judgement concluded that the claimant Other employee costs 877 943 is under a duty to amend the schemes in order to equalise benefits for men and women in relation to Guaranteed Minimum Total employee costs 4,352 4,988 Additional Information Pension (GMP) benefits. The judgement affects some of the occupational pension schemes of British Airways as set out in note 1 Other employee costs include allowances and accommodation for crew. 30. The estimated increase in IAS 19 liabilities as a result of the High Court judgement has been recorded as an exceptional charge of €94 million. The number of employees during the year and at December 31 was as follows: 2018 2017 5 Expenses by nature December 31, 2018 December 31, 2017 Average Average Operating profit is arrived at after charging number of Number of Percentage number of Number of Percentage Depreciation, amortisation and impairment of non-current assets: employees employees of women employees employees of women Senior executives 196 208 27% 166 190 24% € million 2018 2017 Ground employees: Owned assets 711 641 Managerial 1,829 1,906 41% 2,334 2,296 43% Finance leased aircraft 371 382 Non-managerial 33,230 32,161 35% 32,572 32,877 35% Other leasehold interests 40 41 Technical crew: Amortisation of intangible assets 132 120 Managerial 6,673 6,726 17% 6,644 6,595 11% 1,254 1,184 Non-managerial 22,806 22,530 66% 21,706 22,036 68% Operating leases costs: 64,734 63,531 63,422 63,994

€ million 2018 2017 Minimum lease rentals – aircraft 890 888 – property and equipment 236 224 Sub-lease rentals received (12) (1) 1,114 1,111

Cost of inventories:

€ million 2018 2017 Cost of inventories recognised as an expense, mainly fuel 3,165 3,176

132 133 www.iairgroup.com 133 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

8 Finance costs, income and other non-operating (charges)/credits a Finance costs € million 2018 2017 Interest expense on: Bank borrowings (17) (20) Finance leases (144) (116) Provisions unwinding of discount (27) (20) Other borrowings (56) (75) Capitalised interest on progress payments 13 7 Change in fair value of cross currency swaps – (1) (231) (225) b Finance income € million 2018 2017 Interest on other interest-bearing deposits 33 28 Other finance income 8 17 41 45 c Net financing credit/(charge) relating to pensions € million 2018 2017 Net financing credit/(charge) relating to pensions 27 (28) d Other non-operating (charges)/credits € million 2018 2017 Loss on sale of property, plant and equipment and investments (29) (30) Gain related to equity investments (note 16) 5 7 Share of profits in investments accounted for using the equity method (note 15) 5 3 Realised gain/(losses) on derivatives not qualifying for hedge accounting 20 (19) Unrealised (losses)/gains on derivatives not qualifying for hedge accounting (10) 28 (9) (11)

9 Tax a Tax charges Tax (charge)/credit in the Income statement, Other comprehensive income and Statement of changes in equity: For the year to December 31, 2018

Other Statement Income comprehensive of changes € million statement income in equity Total Current tax Movement in respect of prior years 4 – – 4 Movement in respect of current year (475) 162 – (313) Total current tax (471) 162 – (309)

Deferred tax Movement in respect of prior years 22 – – 22 Movement in respect of current year (144) 206 – 62 Tax rate change 3 (13) – (10) Total deferred tax (119) 193 – 74

Total tax (590) 355 – (235) Current tax in Other comprehensive income relates to employee retirement benefit plans, (€136m) and cash flow hedges (€26m).

134 134 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

For the year to December 31, 2017 (restated) 8 Finance costs, income and other non-operating (charges)/credits Strategic Report a Finance costs Other Statement Income comprehensive of changes € million 2018 2017 € million statement income in equity Total Interest expense on: Current tax Bank borrowings (17) (20) Movement in respect of prior years 12 – – 12 Finance leases (144) (116) Movement in respect of current year (319) 126 1 (192) Provisions unwinding of discount (27) (20) Total current tax (307) 126 1 (180)

Other borrowings (56) (75) Corporate Governance Capitalised interest on progress payments 13 7 Deferred tax Change in fair value of cross currency swaps – (1) Movement in respect of prior years (8) – – (8) (231) (225) Movement in respect of current year (155) (307) 2 (460) b Finance income Tax rate change (2) 12 – 10 € million 2018 2017 Total deferred tax (165) (295) 2 (458) Interest on other interest-bearing deposits 33 28 Other finance income 8 17 Total tax (472) (169) 3 (638) 41 45 Current tax in Other comprehensive income relates to employee retirement benefit plans and current tax in the Statement of changes in equity relates to share-based payment schemes. c Net financing credit/(charge) relating to pensions Financial Statements € million 2018 2017 Current tax account Net financing credit/(charge) relating to pensions 27 (28) Restated Other Statement of opening Income comprehensive changes in Exchange Closing d Other non-operating (charges)/credits € million balance statement income equity Cash movements balance € million 2018 2017 2018 180 (471) 162 – 343 4 218 Loss on sale of property, plant and equipment and investments (29) (30) 2017 127 (307) 126 1 237 (4) 180

Gain related to equity investments (note 16) 5 7 Current tax asset is €383 million (2017 restated: €258 million) and current tax liability is €165 million (2017 restated: €78 million). Share of profits in investments accounted for using the equity method (note 15) 5 3 Realised gain/(losses) on derivatives not qualifying for hedge accounting 20 (19) b Deferred tax

Unrealised (losses)/gains on derivatives not qualifying for hedge accounting (10) 28 For the year to December 31, 2018 Additional Information

(9) (11) Restated Other Statement Exchange opening Income comprehensive of changes movements Closing € million balance statement income in equity and other balance 9 Tax Property, plant and equipment (1,029) 19 – – 11 (999) a Tax charges Employee leaving indemnities and other Tax (charge)/credit in the Income statement, Other comprehensive income and Statement of changes in equity: employee related provisions 374 (25) – – (1) 348 For the year to December 31, 2018 Tax losses carried forward 352 (15) – – – 337 Fair value losses recognised on cash flow hedges 39 – 195 – – 234 Other Statement Income comprehensive of changes Employee benefit plans 140 (96) (2) – – 42 € million statement income in equity Total Tax assets in relation to tax credits and Current tax deductions 78 (3) – – (1) 74 Movement in respect of prior years 4 – – 4 Share-based payment schemes 15 2 – – (1) 16 Movement in respect of current year (475) 162 – (313) Foreign exchange 2 (3) – – – (1) Total current tax (471) 162 – (309) Deferred revenue 7 2 – – – 9 Other items 19 – – – 4 23 Deferred tax Total deferred tax (3) (119) 193 – 12 83 Movement in respect of prior years 22 – – 22 The deferred tax asset is €536 million (2017 restated: €523 million) and mainly arises in Spain. A reversal of €87 million on the Movement in respect of current year (144) 206 – 62 deferred tax asset is expected within one year and the remainder beyond one year. Tax rate change 3 (13) – (10) The deferred tax liability is €453 million (2017 restated: €526 million). Total deferred tax (119) 193 – 74 Within tax in Other comprehensive income is a tax credit of €222 million (2017: tax charge of €9 million) that may be reclassified to the Income statement and a tax credit of €133 million (2017 restated: tax charge of €160 million) that may not. Total tax (590) 355 – (235)

Current tax in Other comprehensive income relates to employee retirement benefit plans, (€136m) and cash flow hedges (€26m).

134 135 www.iairgroup.com 135 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

9 Tax continued For the year to December 31, 2017

Restated Other Statement Exchange Restated opening Income comprehensive of changes movements closing € million balance statement income in equity and other balance Property, plant and equipment (1,065) 4 – – 32 (1,029) Employee leaving indemnities and other employee related provisions 372 3 – – (1) 374 Tax losses carried forward 407 (59) – – 4 352 Fair value losses recognised on cash flow hedges 68 – (21) – (8) 39 Employee benefit plans 441 (14) (274) – (13) 140 Tax assets in relation to tax credits and deductions 78 – – – – 78 Share-based payment schemes 13 1 – 2 (1) 15 Foreign exchange 9 (6) – – (1) 2 Deferred revenue 101 (94) – – – 7 Other items 27 – – – (8) 19 Total deferred tax 451 (165) (295) 2 4 (3) c Reconciliation of the total tax charge in the Income statement The tax charge is calculated at the domestic rates applicable to profits or losses in the Group's main countries of operation. The tax charge on the profit for the year to December 31, 2018 is lower than the notional tax charge. The differences are explained below:

2017 € million 2018 (restated) Accounting profit before tax 3,487 2,481

Tax calculated at 25 per cent in Spain (2017: 25 per cent), 19.00 per cent in the UK (2017: 19.25 per cent) and 12.5 per cent in Ireland (2017: 12.5 per cent)1 671 480 Effects of: Tax rate changes (3) 2 Employee benefit plans accounted for net of withholding tax- recurring (1) (4) Employee benefit plans accounted for net of withholding tax - non-recurring (53) – Euro preferred securities accounted for as non-controlling interests (2) (4) Investment credit (10) (7) Movement in respect of prior years (26) (4) Current year tax assets not recognised 9 4 Disposal and write down of investments (1) – Non-deductible expenses - recurring items 7 6 Other items (1) (1) Tax charge in the income statement 590 472

1 The expected tax charge is arrived at by aggregating the expected tax charges arising in each company in the Group. It changes each year as tax rates and profit mix change. d Other taxes The Group was also subject to other taxes and charges paid during the year which are as follows:

€ million 2018 2017 Payroll related taxes 509 478 UK Air Passenger Duty 885 838 Other ticket taxes and charges 1,758 1,694 3,152 3,010

136 136 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

e Factors that may affect future tax charges 9 Tax continued Strategic Report Unrecognised temporary differences - losses For the year to December 31, 2017 € million 2018 2017 Restated Other Statement Exchange Restated opening Income comprehensive of changes movements closing Spanish corporate income tax losses and other temporary differences 47 47 € million balance statement income in equity and other balance UK capital losses arising: Property, plant and equipment (1,065) 4 – – 32 (1,029) Before the change in ownership of the UK Group in 2011 36 36 Employee leaving indemnities and other After the change in ownership of the UK Group in 2011 8 8 employee related provisions 372 3 – – (1) 374 On properties that were eligible for Industrial Buildings Allowances 272 283 Tax losses carried forward 407 (59) – – 4 352 Corporate Governance Irish capital losses 25 25 Fair value losses recognised on cash flow hedges 68 – (21) – (8) 39 Corporate income tax losses outside of the Group's main countries of operation 210 179 Employee benefit plans 441 (14) (274) – (13) 140 Tax assets in relation to tax credits and None of the unrecognised temporary differences have an expiry date. deductions 78 – – – – 78 Unrecognised temporary differences - investment in subsidiaries and associates Share-based payment schemes 13 1 – 2 (1) 15 No deferred tax liability has been recognised in respect of €2,826 million (2017 restated: €1,905 million) of temporary differences Foreign exchange 9 (6) – – (1) 2 relating to subsidiaries and associates. The Group either controls the reversal of these temporary differences and it is probable Deferred revenue 101 (94) – – – 7 that they will not reverse in the foreseeable future or no tax consequences would arise from their reversal. Other items 27 – – – (8) 19 Tax rate changes Total deferred tax 451 (165) (295) 2 4 (3) Reductions in the UK corporation tax rate to 19% (effective from April 1, 2017) and to 18% (effective April 1, 2020) were Financial Statements c Reconciliation of the total tax charge in the Income statement substantively enacted on October 26, 2015, and an additional reduction to 17% (effective April 1, 2020) was substantively enacted The tax charge is calculated at the domestic rates applicable to profits or losses in the Group's main countries of operation. The tax on September 6, 2016. This will reduce the Group's future current tax charge accordingly. The deferred tax on temporary charge on the profit for the year to December 31, 2018 is lower than the notional tax charge. differences and tax losses at December 31, 2018 has been calculated at the rate applicable to the year in which the temporary differences and tax losses are expected to reverse. The differences are explained below: Tax audits 2017 The Group files income tax returns in many jurisdictions throughout the world. Tax returns contain matters that are subject € million 2018 (restated) to potentially differing interpretations of tax laws and regulations, which may give rise to queries from and disputes with tax Accounting profit before tax 3,487 2,481 authorities. The resolution of these queries and disputes can take several years but the Group does not currently expect any material impact on the Group’s financial position or results of operations to arise from such resolution. The extent to which there Tax calculated at 25 per cent in Spain (2017: 25 per cent), 19.00 per cent in the UK (2017: 19.25 per cent) are open queries and disputes depends upon the jurisdiction and the issue. Additional Information and 12.5 per cent in Ireland (2017: 12.5 per cent)1 671 480 Effects of: 10 Earnings per share Tax rate changes (3) 2 2017 Employee benefit plans accounted for net of withholding tax- recurring (1) (4) € million 2018 (restated) Employee benefit plans accounted for net of withholding tax - non-recurring (53) – Earnings attributable to equity holders of the parent for basic earnings 2,885 1,989 Euro preferred securities accounted for as non-controlling interests (2) (4) Interest expense on convertible bonds 18 17 Investment credit (10) (7) Diluted earnings attributable to equity holders of the parent and diluted earnings per share 2,903 2,006 Movement in respect of prior years (26) (4) Current year tax assets not recognised 9 4 2018 2017 Number Number Disposal and write down of investments (1) – ‘000 ‘000 Non-deductible expenses - recurring items 7 6 Weighted average number of ordinary shares in issue1 2,021,622 2,088,489 Other items (1) (1) Assumed conversion on convertible bonds 72,944 72,418 Tax charge in the income statement 590 472 Dilutive employee share schemes outstanding 18,515 18,446 1 The expected tax charge is arrived at by aggregating the expected tax charges arising in each company in the Group. It changes each year as tax rates and Weighted average number for diluted earnings per share 2,113,081 2,179,353 profit mix change. d Other taxes 2017 € cents 2018 (restated) The Group was also subject to other taxes and charges paid during the year which are as follows: Basic earnings per share 142.7 95.2 € million 2018 2017 Diluted earnings per share 137.4 92.0 Payroll related taxes 478 509 1 Includes 27 million as the weighted average impact for 65,956,660 treasury shares purchased in the share buyback programme (note 27). UK Air Passenger Duty 885 838 The calculation of basic and diluted earnings per share before exceptional items is included in the Alternative performance Other ticket taxes and charges 1,758 1,694 measures section. 3,152 3,010

136 137 www.iairgroup.com 137 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

11 Dividends € million 2018 2017 Cash dividend declared Interim dividend for 2018 of 14.5 € cents per share (2017: 12.5 € cents per share) 288 256 Final dividend for 2017 of 14.5 € cents per share (2016: 12.5 € cents per share) 294 262

Proposed cash dividends Final dividend for 2018 of 16.5 € cents per share 327 Special dividend of 35.0 € cents per share 700 The proposed final dividend for 2018 would be distributed from net profit for the year to December 31, 2018. Proposed dividends on ordinary shares are subject to approval at the annual general meeting and subject to approval are recognised as a liability on that date.

12 Property, plant and equipment € million Fleet Property Equipment Total Cost Balance at January 1, 2017 19,739 2,210 1,533 23,482 Additions 1,290 52 102 1,444 Disposals (532) (31) (101) (664) Exchange movements (799) (88) (50) (937) Balance at December 31, 2017 19,698 2,143 1,484 23,325 Additions 2,255 79 140 2,474 Disposals (1,130) – (125) (1,255) Exchange movements (310) (34) (17) (361) December 31, 2018 20,513 2,188 1,482 24,183 Depreciation and impairment Balance at January 1, 2017 9,195 1,053 1,007 11,255 Charge for the year 924 57 83 1,064 Disposals (242) (26) (78) (346) Exchange movements (412) (44) (38) (494) Balance at December 31, 2017 9,465 1,040 974 11,479 Charge for the year 984 55 83 1,122 Disposals (562) – (95) (657) Exchange movements (164) (18) (16) (198) December 31, 2018 9,723 1,077 946 11,746

Net book values December 31, 2018 10,790 1,111 536 12,437 December 31, 2017 10,233 1,103 510 11,846

Analysis at December 31, 2018 Owned 3,935 987 401 5,323 Finance leased 5,695 4 68 5,767 Progress payments 1,069 118 65 1,252 Assets not in current use 91 2 2 95 Property, plant and equipment 10,790 1,111 536 12,437 Analysis at December 31, 2017 Owned 3,875 1,027 400 5,302 Finance leased 5,231 4 62 5,297 Progress payments 958 71 47 1,076 Assets not in current use 169 1 1 171 Property, plant and equipment 10,233 1,103 510 11,846

138 138 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

The net book value of property comprises: 11 Dividends Strategic Report € million 2018 2017 € million 2018 2017 Cash dividend declared Freehold 448 464 Interim dividend for 2018 of 14.5 € cents per share (2017: 12.5 € cents per share) 288 256 Long leasehold improvements > 50 years 330 315 Final dividend for 2017 of 14.5 € cents per share (2016: 12.5 € cents per share) 294 262 Short leasehold improvements < 50 years 333 324 Property 1,111 1,103 Proposed cash dividends At December 31, 2018, bank and other loans of the Group are secured on fleet assets with a cost of €467 million (2017: €938

Final dividend for 2018 of 16.5 € cents per share 327 million) and letters of credit of €256 million in favour of the British Airways Pension Trustees are secured on certain aircraft Corporate Governance Special dividend of 35.0 € cents per share 700 (2017: €260 million).

The proposed final dividend for 2018 would be distributed from net profit for the year to December 31, 2018. 13 Capital expenditure commitments Proposed dividends on ordinary shares are subject to approval at the annual general meeting and subject to approval are Capital expenditure authorised and contracted for but not provided for in the accounts amounts to €10,831 million (December 31, recognised as a liability on that date. 2017: €12,137 million). The majority of capital expenditure commitments are denominated in US dollars, and as such are subject to changes in exchange rates. 12 Property, plant and equipment The outstanding commitments include €10,716 million for the acquisition of 71 Airbus A320s (from 2019 to 2022), 21 Airbus A321s € million Fleet Property Equipment Total (from 2019 to 2020), 4 Airbus A330s (in 2019), 41 Airbus A350s (from 2019 to 2022), 4 Boeing 777-300s (in 2020) and 12 Boeing Cost 787s (from 2020 to 2023). Balance at January 1, 2017 19,739 2,210 1,533 23,482 Financial Statements Additions 1,290 52 102 1,444 14 Intangible assets and impairment review Disposals (532) (31) (101) (664) a Intangible assets Exchange movements (799) (88) (50) (937) Customer Balance at December 31, 2017 19,698 2,143 1,484 23,325 loyalty Landing € million Goodwill Brand programmes rights1 Software Other Total Additions 2,255 79 140 2,474 Cost Disposals (1,130) – (125) (1,255) Balance at January 1, 2017 598 451 253 1,556 861 99 3,818 Exchange movements (310) (34) (17) (361) Additions – – – 1 131 43 175 December 31, 2018 20,513 2,188 1,482 24,183 Disposals – – – – (6) (18) (24)

Depreciation and impairment Additional Information Exchange movements (2) – – (38) (38) 4 (74) Balance at January 1, 2017 9,195 1,053 1,007 11,255 Balance at December 31, 2017 596 451 253 1,519 948 128 3,895 Charge for the year 924 57 83 1,064 Additions – – – 55 195 105 355 Disposals (242) (26) (78) (346) Disposals – – – – (14) (20) (34) Exchange movements (412) (44) (38) (494) Exchange movements (1) – – (15) (13) (2) (31) Balance at December 31, 2017 9,465 1,040 974 11,479 December 31, 2018 595 451 253 1,559 1,116 211 4,185 Charge for the year 984 55 83 1,122 Amortisation and impairment Disposals (562) – (95) (657) Balance at January 1, 2017 249 – – 98 387 47 781 Exchange movements (164) (18) (16) (198) Charge for the year – – – 6 110 4 120 December 31, 2018 9,723 1,077 946 11,746 Disposals – – – – (5) – (5)

Exchange movements – – – (3) (17) 1 (19) Net book values Balance at December 31, 2017 249 – – 101 475 52 877 December 31, 2018 10,790 1,111 536 12,437 Charge for the year – – – 6 123 3 132 December 31, 2017 10,233 1,103 510 11,846 Disposals – – – – (13) – (13)

Exchange movements – – – (1) (8) – (9) Analysis at December 31, 2018 December 31, 2018 249 – – 106 577 55 987 Owned 3,935 987 401 5,323 Net book values Finance leased 5,695 4 68 5,767 December 31, 2018 346 451 253 1,453 539 156 3,198 Progress payments 1,069 118 65 1,252 December 31, 2017 347 451 253 1,418 473 76 3,018 Assets not in current use 91 2 2 95 1 The net book value includes non-EU based landing rights of €100 million (2017: €106 million) that have a definite life. The remaining life of these landing Property, plant and equipment 10,790 1,111 536 12,437 rights is 17 years. Analysis at December 31, 2017

Owned 3,875 1,027 400 5,302 Finance leased 5,231 4 62 5,297 Progress payments 958 71 47 1,076 Assets not in current use 169 1 1 171 Property, plant and equipment 10,233 1,103 510 11,846

138 139 www.iairgroup.com 139 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

14 Intangible assets and impairment review continued b Impairment review The carrying amounts of intangible assets with indefinite life and goodwill allocated to cash generating units (CGUs) of the Group are:

Customer Landing loyalty € million Goodwill rights Brand programmes Total 2018 Iberia January 1 and December 31, 2018 – 423 306 – 729

British Airways January 1, 2018 47 738 – – 785 Additions – 55 – – 55 Transfer to other Group companies – (12) – – (12) Exchange movements (1) (14) – – (15) December 31, 2018 46 767 – – 813

Vueling January 1 and December 31, 2018 28 89 35 – 152

Aer Lingus January 1 and December 31, 2018 272 62 110 – 444

Avios January 1 and December 31, 2018 – – – 253 253

Other Group companies January 1, 2018 – – – – – Transfer from British Airways – 12 – – 12 December 31, 2018 – 12 – – 12

December 31, 2018 346 1,353 451 253 2,403

Customer Landing loyalty € million Goodwill rights Brand programmes Total 2017 Iberia January 1 and December 31, 2017 – 423 306 – 729

British Airways January 1, 2017 49 771 – – 820 Additions – 1 – – 1 Exchange movements (2) (34) – – (36) December 31, 2017 47 738 – – 785

Vueling January 1 and December 31, 2017 28 89 35 – 152

Aer Lingus January 1 and December 31, 2017 272 62 110 – 444

Avios January 1 and December 31, 2017 – – – 253 253

December 31, 2017 347 1,312 451 253 2,363

140 140 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

Basis for calculating recoverable amount 14 Intangible assets and impairment review continued Strategic Report The recoverable amounts of CGUs have been measured based on their value-in-use. b Impairment review The carrying amounts of intangible assets with indefinite life and goodwill allocated to cash generating units (CGUs) of the Value-in-use is calculated using a discounted cash flow model. Cash flow projections are based on the Business plan approved Group are: by the Board covering a five year period. Cash flows extrapolated beyond the five year period are projected to increase based on long-term growth rates. Cash flow projections are discounted using the CGU’s pre-tax discount rate. Customer Landing loyalty Annually the Group prepares and the Board approves five year business plans. Business plans were approved in the fourth quarter € million Goodwill rights Brand programmes Total of the year. The business plan cash flows used in the value-in-use calculations reflect all restructuring of the business that has been 2018 approved by the Board and which can be executed by Management under existing agreements. Corporate Governance Iberia Key assumptions January 1 and December 31, 2018 – 423 306 – 729 For each of the CGUs the key assumptions used in the value-in-use calculations are as follows:

2018 British Airways British January 1, 2018 47 738 – – 785 Per cent Airways Iberia Vueling Aer Lingus Avios Additions – 55 – – 55 Lease adjusted operating margin 15 9-15 11-15 15 211 Transfer to other Group companies – (12) – – (12) Average ASK growth per annum 3-4 5-6 9-10 7-8 n/a1 Exchange movements (1) (14) – – (15) Long-term growth rate 2.3 2.0 1.9 1.8 1.9 December 31, 2018 46 767 – – 813 Pre-tax discount rate 8.3 9.0 8.4 8.3 9.3

Financial Statements Vueling 2017 January 1 and December 31, 2018 28 89 35 – 152 British Per cent Airways Iberia Vueling Aer Lingus Avios

Lease adjusted operating margin 15 10-14 12-15 15 211 Aer Lingus Average ASK growth per annum 2 8 10 5 n/a1 January 1 and December 31, 2018 272 62 110 – 444 Long-term growth rate 2.3 2.0 2.0 2.0 2.0

Pre-tax discount rate 8.5 9.8 10.6 7.8 9.1 Avios January 1 and December 31, 2018 – – – 253 253 1 Operating margin for the Avios loyalty reward business is not adjusted for aircraft leases. ASK growth rate assumption is not applicable for Avios, which conducts business with partners both within and outside IAG.

Lease adjusted operating margin is the average annual operating result, adjusted for aircraft operating lease costs, as a percentage Additional Information Other Group companies of revenue over the five year Business plan to 2023. It is presented as a percentage point range and is based on past performance, January 1, 2018 – – – – – Management’s expectation of the market development and incorporating risks into the cash flow estimates. Transfer from British Airways – 12 – – 12 ASK growth is the average annual increase over the Business plan, based on planned network growth and taking into account December 31, 2018 – 12 – – 12 Management’s expectation of the market.

The long-term growth rate is calculated for each CGU based on the forecasted weighted average exposure in each primary market December 31, 2018 346 1,353 451 253 2,403 using gross domestic product (GDP) (source: Oxford Economics). The airline’s network plans are reviewed annually as part of the Business plan and reflect Management’s plans in response to specific market risk or opportunity. Customer Landing loyalty Pre-tax discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the € million Goodwill rights Brand programmes Total time value of money and underlying risks of its primary market. The discount rate calculation is based on the circumstances of the 2017 airline industry, the Group and the CGU. It is derived from the weighted average cost of capital (WACC). The WACC takes into Iberia consideration both debt and equity available to airlines. The cost of equity is derived from the expected return on investment by airline investors and the cost of debt is broadly based on the Group’s interest-bearing borrowings. CGU specific risk is incorporated January 1 and December 31, 2017 – 423 306 – 729 by applying individual beta factors which are evaluated annually based on available market data. The pre-tax discount rate reflects the timing of future tax flows. British Airways Summary of results January 1, 2017 49 771 – – 820 In 2018, Management reviewed the recoverable amount of each of its CGUs and concluded the recoverable amounts exceeded Additions – 1 – – 1 the carrying values. Sensitivities have been considered for each CGU. Reducing long-term growth rates to zero, increasing pre-tax Exchange movements (2) (34) – – (36) discount rates by 4 percentage points, and increasing the fuel price by 40 per cent, does not result in any impairment. December 31, 2017 47 738 – – 785

Vueling January 1 and December 31, 2017 28 89 35 – 152

Aer Lingus January 1 and December 31, 2017 272 62 110 – 444

Avios January 1 and December 31, 2017 – – – 253 253

December 31, 2017 347 1,312 451 253 2,363

140 141 www.iairgroup.com 141 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

15 Investments a Investments in subsidiaries The Group’s principal subsidiaries at December 31, 2018 are listed in the Group investments section. All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held directly do not differ from the proportion of ordinary shares held. There have been no significant changes in ownership interests of subsidiaries during the year. On August 28, 2018, British Airways exercised its option to redeem its €300 million, 6.75 per cent fixed coupon preferred securities which were previously classified as a non-controlling interest. The total non-controlling interest at December 31, 2018 is €6 million (2017: €307 million). British Airways Employee Benefit Trustee (Jersey) Limited, a wholly-owned subsidiary of British Airways, governs the British Airways Plc Employee Share Ownership Trust (the Trust). The Trust is not a legal subsidiary of IAG; however, it is consolidated within the Group results. b Investments in associates and joint ventures The share of assets, liabilities, revenue and profit of the Group’s associates and joint ventures, which are included in the Group’s financial statements, are as follows:

€ million 2018 2017 Total assets 113 96 Total liabilities (77) (68) Revenue 75 86 Profit for the year 5 3

The detail of the movement in Investment in associates and joint ventures is shown as follows:

€ million 2018 2017 At beginning of year 30 29 Share of retained profits 5 3 Additions – 2 Disposals – (2) Dividends received (2) (3) Exchange movements (2) 1 31 30 At December 31, 2018 there are no restrictions on the ability of associates or joint ventures to transfer funds to the parent and there are no related contingent liabilities. At both December 31, 2018 and December 31, 2017 the investment in Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. exceeded 50 per cent ownership by the Group (50.5 per cent). The entity is treated as a joint venture as decisions regarding its strategy and operations require the unanimous consent of the parties who share control, including IAG.

16 Other equity investments Other equity investments include the following:

€ million 2018 2017 Listed securities Comair Limited 17 23 Unlisted securities 63 56 80 79 The gain relating to other equity investments was €5 million (2017: €7 million).

142 142 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

15 Investments 17 Trade and other receivables Strategic Report a Investments in subsidiaries 2017 € million 2018 (restated) The Group’s principal subsidiaries at December 31, 2018 are listed in the Group investments section. Amounts falling due within one year All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held Trade receivables 1,695 1,526 directly do not differ from the proportion of ordinary shares held. There have been no significant changes in ownership interests of Provision for expected credit loss (98) (63) subsidiaries during the year. Net trade receivables 1,597 1,463 On August 28, 2018, British Airways exercised its option to redeem its €300 million, 6.75 per cent fixed coupon preferred securities Prepayments and accrued income 823 764 which were previously classified as a non-controlling interest. The total non-controlling interest at December 31, 2018 is €6 million Corporate Governance (2017: €307 million). Other non-trade debtors 352 194 2,772 2,421 British Airways Employee Benefit Trustee (Jersey) Limited, a wholly-owned subsidiary of British Airways, governs the British Amounts falling due after one year Airways Plc Employee Share Ownership Trust (the Trust). The Trust is not a legal subsidiary of IAG; however, it is consolidated within the Group results. Prepayments and accrued income 298 297 Other interest-bearing deposits (greater than one year) – 66 b Investments in associates and joint ventures Other non-trade debtors 11 13 The share of assets, liabilities, revenue and profit of the Group’s associates and joint ventures, which are included in the Group’s 309 376 financial statements, are as follows:

€ million 2018 2017 Movements in the provision for expected credit loss were as follows: Total assets 113 96 € million 2018 2017 Total liabilities (77) (68) At beginning of year 63 64 Financial Statements Revenue 75 86 Provision for expected credit loss 36 15 Profit for the year 5 3 Release of unused amounts (2) (1) Receivables written off during the year 1 (13) The detail of the movement in Investment in associates and joint ventures is shown as follows: Exchange movements – (2) € million 2017 2018 98 63 At beginning of year 30 29 Share of retained profits 5 3 Trade receivables are generally non-interest-bearing and on 30 days terms (2017: 30 days). Additions – 2 The credit risk exposure on the Group's trade receivables is set out below:

Disposals – (2) Additional Information December 31, 2018 Dividends received (2) (3) € million Current <30 days 30-60 days >60 days Exchange movements (2) 1 Trade receivables 988 163 135 409 31 30 Expected credit loss rate 0.04% 0.29% 1.60% 23.26% At December 31, 2018 there are no restrictions on the ability of associates or joint ventures to transfer funds to the parent and there Provision for expected credit loss 1 – 2 95 are no related contingent liabilities. December 31, 2017 At both December 31, 2018 and December 31, 2017 the investment in Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. exceeded 50 per cent ownership by the Group (50.5 per cent). The entity is treated as a joint venture as decisions € million Current <30 days 30-60 days >60 days regarding its strategy and operations require the unanimous consent of the parties who share control, including IAG. Trade receivables 1,159 119 135 113 Expected credit loss rate 0.05% 1.13% 0.11% 53.92% 16 Other equity investments Provision for expected credit loss 1 1 – 61 Other equity investments include the following: € million 2018 2017 Listed securities Comair Limited 17 23 Unlisted securities 63 56 80 79 The gain relating to other equity investments was €5 million (2017: €7 million).

142 143 www.iairgroup.com 143 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

18 Cash, cash equivalents and other current interest-bearing deposits € million 2018 2017 Cash at bank and in hand 2,453 1,963 Short-term deposits maturing within three months 1,384 1,329 Cash and cash equivalents 3,837 3,292 Other current interest-bearing deposits maturing after three months 2,437 3,384 Cash, cash equivalents and other interest-bearing deposits 6,274 6,676 Cash at bank is primarily held in AAA money market funds and bank deposits. Short-term deposits are for periods up to three months and earn interest based on the floating deposit rates. At December 31, 2018 the Group had no outstanding bank overdrafts (2017: nil). Current interest-bearing deposits are made for periods in excess of three months with maturity typically within 12 months and earn interest based on the market rates available at the time the deposit was made. At December 31, 2018 Aer Lingus held €42 million of restricted cash (2017: €43 million) within interest-bearing deposits maturing after more than three months to be used for employee related obligations. a Net debt Movements in net debt were as follows:

Balance at Balance at January 1, Exchange December € million 2018 Cash flows movements Non-cash 31, 2018 Bank and other loans (1,824) 275 (4) (28) (1,581) Finance leases (5,507) (254) (134) (33) (5,928) Interest-bearing borrowings (7,331) 21 (138) (61) (7,509) Cash and cash equivalents 3,292 583 (38) – 3,837 Other current interest-bearing deposits 3,384 (924) (23) – 2,437 (655) (320) (199) (61) (1,235)

Balance at Balance at January 1, Exchange December € million 2017 Cash flows movements Non-cash 31, 2017 Bank and other loans (1,913) 138 26 (75) (1,824) Finance leases (6,602) 657 424 14 (5,507) Interest-bearing borrowings (8,515) 795 450 (61) (7,331) Cash and cash equivalents 3,337 141 (186) – 3,292 Other current interest-bearing deposits 3,091 432 (139) – 3,384 (2,087) 1,368 125 (61) (655)

19 Trade and other payables € million 2018 2017 Trade creditors 2,079 2,092 Other creditors 1,007 926 Other taxation and social security 332 238 Accruals and deferred income 541 467 3,959 3,723 Average payment days to suppliers - Spanish Group companies Days 2018 2017 Average payment days for payment to suppliers 37 37 Ratio of transactions paid 33 38 Ratio of transactions outstanding for payment 119 35

€ million 2018 2017 Total payments made 6,306 4,879 Total payments outstanding 317 140

144 144 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

18 Cash, cash equivalents and other current interest-bearing deposits 20 Deferred revenue on ticket sales Strategic Report € million 2018 2017 Customer Sales in loyalty advance of Cash at bank and in hand 1,963 2,453 € million programmes carriage Total Short-term deposits maturing within three months 1,329 1,384 Balance at January 1, 2018 1,752 2,990 4,742 Cash and cash equivalents 3,837 3,292 Changes in estimates – (8) (8) Other current interest-bearing deposits maturing after three months 2,437 3,384 Revenue recognised in the Income statement1 (733) (22,027) (22,760) Cash, cash equivalents and other interest-bearing deposits 6,274 6,676 Loyalty points issued to customers 781 – 781

Cash at bank is primarily held in AAA money market funds and bank deposits. Short-term deposits are for periods up to three Cash received from customers – 22,149 22,149 Corporate Governance months and earn interest based on the floating deposit rates. Other movements (31) (38) (69) At December 31, 2018 the Group had no outstanding bank overdrafts (2017: nil). Balance at December 31, 2018 1,769 3,066 4,835

Current interest-bearing deposits are made for periods in excess of three months with maturity typically within 12 months and earn Customer Sales in interest based on the market rates available at the time the deposit was made. loyalty advance of € million programmes carriage Total At December 31, 2018 Aer Lingus held €42 million of restricted cash (2017: €43 million) within interest-bearing deposits maturing after more than three months to be used for employee related obligations. Balance at December 31, 2016 1,300 2,845 4,145 Restated for IFRS 15 497 38 535 a Net debt Balance at January 1, 2017 1,797 2,883 4,680 Movements in net debt were as follows: Changes in estimates (2) (43) (45) Financial Statements Balance at Balance at Revenue recognised in the income statement1 (704) (19,803) (20,507) January 1, Exchange December € million 2018 Cash flows movements Non-cash 31, 2018 Loyalty points issued to customers 735 – 735 Bank and other loans (1,824) 275 (4) (28) (1,581) Cash received from customers – 20,050 20,050 Finance leases (5,507) (254) (134) (33) (5,928) Other movements (74) (97) (171) Interest-bearing borrowings (7,331) 21 (138) (61) (7,509) Balance at December 31, 2017 1,752 2,990 4,742 Cash and cash equivalents 3,292 583 (38) – 3,837 1 Where the Group acts as an agent in the provision of redemption products and services to customers through loyalty programmes, or in the provision of interline flights to passengers, revenue is recognised in the income statement net of the related costs. Other current interest-bearing deposits 3,384 (924) (23) – 2,437 (655) (320) (199) (61) (1,235) Deferred revenue relating to customer loyalty programmes consists primarily of revenue allocated to performance obligations associated with Avios points. Avios points are issued by the Group's airlines through their loyalty programmes, or are sold to third

Additional Information parties such as credit card providers, who issue them as part of their loyalty programme. Active customer accounts do not have an Balance at Balance at January 1, Exchange December expiry date and revenue may therefore be recognised at any time in the future. Deferred revenue in respect of sales in advance of € million 2017 Cash flows movements Non-cash 31, 2017 carriage consists of revenue allocated to airline tickets to be used for future travel. Typically these tickets expire within 12 months Bank and other loans (1,913) 138 26 (75) (1,824) after the planned travel date, if they are not used within that time period. Finance leases (6,602) 657 424 14 (5,507) Interest-bearing borrowings (8,515) 795 450 (61) (7,331) 21 Other long-term liabilities Cash and cash equivalents 3,337 141 (186) – 3,292 € million 2018 2017 Other current interest-bearing deposits 3,091 432 (139) – 3,384 Non-current trade creditors 6 3 (2,087) 1,368 125 (61) (655) Accruals and deferred income 192 219 198 222 19 Trade and other payables € million 2018 2017 22 Long-term borrowings Trade creditors 2,079 2,092 a Current Other creditors 1,007 926 € million 2018 2017 Other taxation and social security 332 238 Bank and other loans 153 183 Accruals and deferred income 541 467 Finance leases 723 747 3,959 3,723 876 930 Average payment days to suppliers - Spanish Group companies b Non-current Days 2018 2017 € million 2018 2017 Average payment days for payment to suppliers 37 37 Bank and other loans 1,428 1,641 Ratio of transactions paid 33 38 Finance leases 5,205 4,760 Ratio of transactions outstanding for payment 119 35 6,633 6,401

Banks and other loans are repayable up to the year 2027. Bank and other loans of the Group amounting to €354 million € million 2018 2017 (2017: €539 million) are secured on aircraft. Finance leases are all secured on aircraft or property, plant and equipment. Total payments made 6,306 4,879

Total payments outstanding 317 140

144 145 www.iairgroup.com 145 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

22 Long-term borrowings continued c Bank and other loans € million 2018 2017 €500 million fixed rate 0.25 per cent convertible bond 20201 482 472 €500 million fixed rate 0.625 per cent convertible bond 20221 460 450 Floating rate euro mortgage loans secured on aircraft2 252 278 €200 million fixed rate unsecured bonds3 175 200 Floating rate euro syndicate loan secured on investments4 99 148 Fixed rate Chinese yuan mortgage loans secured on aircraft5 53 68 Fixed rate unsecured US dollar mortgage loan6 43 49 Fixed rate unsecured euro loans with the Spanish State (Department of Industry)7 13 15 Floating rate pound sterling mortgage loans secured on aircraft8 4 27 Fixed rate US dollar mortgage loans secured on aircraft9 – 117 1,581 1,824 Less current instalments due on bank and other loans (153) (183) 1,428 1,641

1 Two senior unsecured bonds convertible into ordinary shares of IAG were issued by the Group in November 2015; €500 million fixed rate 0.25 per cent raising net proceeds of €494 million and due in 2020, and €500 million fixed rate 0.625 per cent raising net proceeds of €494 million and due in 2022. The Group holds an option to redeem each convertible bond at its principal amount, together with accrued interest, no earlier than two years prior to the final maturity date. The bonds contain dividend protection, and a total of 73,455,109 options related to the bonds were outstanding from issuance and at December 31, 2018. 2 Floating rate euro mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 0.182 and 1.191 per cent. The loans are repayable between 2024 and 2027. 3 Total of €200 million fixed rate unsecured bonds between 2.5 to 3.75 per cent coupon repayable between 2019 and 2027. 4 Floating rate euro syndicate loan secured on investments is secured on specific assets of the Group and bears interest of 1.375 per cent plus 3 month EURIBOR. The loan is repayable in 2020. 5 Fixed rate Chinese yuan mortgage loans are secured on specific aircraft assets of the Group and bears interest of 5.20 per cent. The loans are repayable in 2022. 6 Fixed rate unsecured US dollar mortgage loan bearing interest between 1.98 and 2.37 per cent. The loan is repayable in 2023. 7 Fixed rate unsecured euro loans with the Spanish State (Department of Industry) bear interest of between nil and 5.68 per cent and are repayable between 2019 and 2026. 8 Floating rate pound sterling mortgage loans are secured on specific aircraft assets of the Group and bear interest of 0.81 per cent. The loans are repayable in 2019. 9 Fixed rate US dollar mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 3.81 and 4.76 per cent. The loans were repaid in 2018. d Total loans and finance leases Million 2018 2017 Loans Bank: US dollar $49 $196 Euro €364 €440 Pound sterling £4 £25 Chinese yuan CNY 422 CNY 525 €465 €702

Fixed rate bonds: Euro €1,116 €1,122 €1,116 €1,122

Finance leases US dollar $3,259 $2,882 Euro €2,308 €2,296 Japanese yen ¥77,379 ¥63,978 Pound sterling £134 £258 €5,928 €5,507

€7,509 €7,331

146 146 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

e Obligations under finance leases 22 Long-term borrowings continued Strategic Report The Group uses finance leases principally to acquire aircraft. These leases have both renewal and purchase options, at the option c Bank and other loans of the Group. Future minimum finance lease payments under finance leases are as follows: € million 2018 2017 € million 2018 2017 €500 million fixed rate 0.25 per cent convertible bond 20201 482 472 Future minimum payments due: €500 million fixed rate 0.625 per cent convertible bond 20221 460 450 Within one year 876 875 Floating rate euro mortgage loans secured on aircraft2 252 278 Between one and five years 3,186 2,783 €200 million fixed rate unsecured bonds3 175 200 4 Over five years 2,642 2,464

Floating rate euro syndicate loan secured on investments 99 148 Corporate Governance 6,704 6,122 Fixed rate Chinese yuan mortgage loans secured on aircraft5 53 68 Less: finance charges (776) (615) Fixed rate unsecured US dollar mortgage loan6 43 49 Present value of minimum lease payments 5,507 Fixed rate unsecured euro loans with the Spanish State (Department of Industry)7 13 15 5,928 Floating rate pound sterling mortgage loans secured on aircraft8 4 27 The present value of minimum lease payments is analysed as follows: Fixed rate US dollar mortgage loans secured on aircraft9 – 117 Within one year 723 747 1,581 1,824 Between one and five years 2,734 2,409 Less current instalments due on bank and other loans (153) (183) Over five years 2,471 2,351 1,428 1,641 5,928 5,507

1 Two senior unsecured bonds convertible into ordinary shares of IAG were issued by the Group in November 2015; €500 million fixed rate 0.25 per cent raising net proceeds of €494 million and due in 2020, and €500 million fixed rate 0.625 per cent raising net proceeds of €494 million and due in 2022. 23 Operating lease commitments Financial Statements The Group holds an option to redeem each convertible bond at its principal amount, together with accrued interest, no earlier than two years prior to the final maturity date. The bonds contain dividend protection, and a total of 73,455,109 options related to the bonds were outstanding from issuance and at The Group has entered into commercial leases on certain properties, equipment and aircraft. These leases have durations ranging December 31, 2018. from less than one year to 13 years for aircraft and less than one year to five years for property, plant and equipment. One ground 2 Floating rate euro mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 0.182 and 1.191 per cent. The loans are lease has a remaining lease of 127 years. Certain leases contain options for renewal. repayable between 2024 and 2027. The aggregate payments, for which there are commitments under operating leases, fall due as follows: 3 Total of €200 million fixed rate unsecured bonds between 2.5 to 3.75 per cent coupon repayable between 2019 and 2027. 4 Floating rate euro syndicate loan secured on investments is secured on specific assets of the Group and bears interest of 1.375 per cent plus 3 month 2018 2017 EURIBOR. The loan is repayable in 2020. Property, Property, plant and plant and 5 Fixed rate Chinese yuan mortgage loans are secured on specific aircraft assets of the Group and bears interest of 5.20 per cent. The loans are repayable € million Fleet Total Fleet equipment Total in 2022. equipment 6 Fixed rate unsecured US dollar mortgage loan bearing interest between 1.98 and 2.37 per cent. The loan is repayable in 2023. Within one year 975 148 1,123 802 190 992 Additional Information Between one and five years 2,559 340 2,899 7 Fixed rate unsecured euro loans with the Spanish State (Department of Industry) bear interest of between nil and 5.68 per cent and are repayable between 3,049 362 3,411 2019 and 2026. Over five years 2,235 1,895 4,130 1,789 1,962 3,751 8 Floating rate pound sterling mortgage loans are secured on specific aircraft assets of the Group and bear interest of 0.81 per cent. The loans are repayable 6,259 2,405 8,664 5,150 2,492 7,642 in 2019. 9 Fixed rate US dollar mortgage loans are secured on specific aircraft assets of the Group and bear interest of between 3.81 and 4.76 per cent. The loans were Sub-leasing repaid in 2018. The Group entered into subleases for certain surplus rental properties and aircraft assets held under non-cancellable leases d Total loans and finance leases to third parties. These leases have remaining terms of one to six years and the assets are surplus to the Group’s requirements. Future minimum rentals receivable under non-cancellable operating leases are €13 million (2017: €8 million) with €4 million Million 2018 2017 (2017: €7 million) falling within one year, €9 million (2017: €1 million) between one and five years and nil (2017: nil) over five years. Loans Bank: US dollar $49 $196 Euro €364 €440 Pound sterling £4 £25 Chinese yuan CNY 422 CNY 525 €465 €702

Fixed rate bonds: Euro €1,116 €1,122 €1,116 €1,122

Finance leases US dollar $3,259 $2,882 Euro €2,308 €2,296 Japanese yen ¥77,379 ¥63,978 Pound sterling £134 £258 €5,928 €5,507

€7,509 €7,331

146 147 www.iairgroup.com 147 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

24 Provision for liabilities and charges Employee leaving indemnities Restoration and other and employee handback Restructuring related Legal claims Other € million provisions provisions provisions provisions provisions Total Net book value January 1, 2018 1,125 727 599 140 69 2,660 Provisions recorded during the year 378 192 223 43 100 936 Utilised during the year (150) (220) (202) (46) (90) (708) Release of unused amounts (42) (8) (45) (26) (5) (126) Unwinding of discount 6 4 16 1 – 27 Exchange differences 42 (2) – – (2) 38 Net book value December 31, 2018 1,359 693 591 112 72 2,827 Analysis: Current 148 237 60 78 36 559 Non-current 1,211 456 531 34 36 2,268 1,359 693 591 112 72 2,827 Restoration and handback provisions The provision for restoration and handback costs is maintained to meet the contractual maintenance and return conditions on aircraft held under operating leases. The provision also includes an amount relating to leased land and buildings where restoration costs are contractually required at the end of the lease. Where such costs arise as a result of capital expenditure on the leased asset, the restoration costs are capitalised. The provision is a long-term provision, typically covering the leased asset term which is up to 13 years. Restructuring provisions The restructuring provision includes provisions for voluntary redundancies including the collective redundancy programme for Iberia's Transformation Plan, which provides for payments to affected employees until they reach the statutory retirement age. The amount provided for has been determined by an actuarial valuation made by independent actuaries, and was based on the same assumptions as those made to determine the provisions for obligations to flight crew below, with the exception of the discount rate, which in this case was 0.39 per cent. The payments related to this provision will continue over next ten years. During the year the Group recognised a provision of €136 million in relation to the restructuring plans at British Airways (note 4). The transformation programme has now been completed. At December 31, 2018, €682 million of this provision related to collective redundancy programmes (2017: €719 million). Employee leaving indemnities and other employee related provisions This provision includes employees leaving indemnities relating to staff under various contractual arrangements. The Group recognises a provision relating to flight crew who having met certain conditions, have the option of being placed on reserve and retaining their employment relationship until reaching the statutory retirement age, or taking early retirement. The Group is required to remunerate these employees until they reach the statutory retirement age, and an initial provision was recognised based on an actuarial valuation. The provision was reviewed at December 31, 2018 with the use of independent actuaries using the projected unit credit method, based on a discount rate consistent with the iBoxx index of 1.59 per cent and 0.39 per cent depending on whether the employees are currently active or not, the PERM/F-2000P mortality tables, and assuming a 1.50 per cent annual increase in the Consumer Price Index (CPI). This is mainly a long-term provision. The amount relating to this provision was €523 million at December 31, 2018 (2017: €542 million). Legal claims provisions Legal claims provisions includes: • amounts for multi-party claims from groups or employees on a number of matters related to its operations, including claims for additional holiday pay and for age discrimination; • provisions related to tax assessments; and • amounts related to investigations by a number of competition authorities in connection with alleged anti-competitive activity concerning the Group’s passenger and cargo businesses. The final amount required to pay the remaining claims and fines is subject to uncertainty (note 31). This provision includes the payment of €104 million for the reissued fine in March 2017 against British Airways, related to investigations by a number of competition authorities in connection with alleged anti-competitive activity concerning the Group's passenger and cargo businesses (note 31).

148 148 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

Other provisions 24 Provision for liabilities and charges Strategic Report Other provisions includes: Employee leaving • amounts for passengers whose flights were significantly delayed and are entitled to receive compensation. This provision is indemnities Restoration and other largely a current provision and is expected to have amounts both utilised and provided for each year. This provision is reassessed and employee based on the historic level of claims; handback Restructuring related Legal claims Other • a provision for the Emissions Trading Scheme that for CO2 emitted on flights within the EU in excess of the EU Emission € million provisions provisions provisions provisions provisions Total Allowances granted; and Net book value January 1, 2018 1,125 727 599 140 69 2,660 • a provision related to unfavourable fleet contracts. Provisions recorded during the year 378 192 223 43 100 936 Corporate Governance Utilised during the year (150) (220) (202) (46) (90) (708) 25 Financial risk management objectives and policies Release of unused amounts (42) (8) (45) (26) (5) (126) The Group is exposed to a variety of financial risks: market risk (including fuel price risk, foreign currency risk and interest rate risk), Unwinding of discount 6 4 16 1 – 27 counterparty risk and liquidity risk. Further information on the Group’s financial instruments exposure to these risks is disclosed on Exchange differences 42 (2) – – (2) 38 note 26. The Board approves the key strategic principles and the risk appetite, defining the amount of risk that the Group is Net book value December 31, 2018 1,359 693 591 112 72 2,827 prepared to retain. The Group's Financial Risk Management programme focuses on the unpredictability of financial markets and Analysis: seeks to minimise the risk of incremental costs arising from adverse financial markets movements. Current 148 237 60 78 36 559 Financial risks are managed under the oversight of the Group Treasury department. Fuel price fluctuations, euro-US dollar and Non-current 1,211 456 531 34 36 2,268 sterling-US dollar exchange rate volatility represents the largest financial risks facing the Group. Other currencies as well as interest 1,359 693 591 112 72 2,827 rate risk are also the subject of the Financial Risk Management programme. The IAG Management Committee approves the Group hedging profile and delegates to the operating company Risk Committee to agree on the degree of flexibility in applying the levels Restoration and handback provisions as defined by the IAG Management Committee. Each operating company Risk Committee meets at least once a month to review Financial Statements The provision for restoration and handback costs is maintained to meet the contractual maintenance and return conditions on and approve a mandate to place hedging cover in the market including the instruments to be used. aircraft held under operating leases. The provision also includes an amount relating to leased land and buildings where restoration The Group Treasury Committee provides a quarterly report on the hedging position to the IAG Management Committee and the costs are contractually required at the end of the lease. Where such costs arise as a result of capital expenditure on the leased Audit and Compliance Committee. The Board reviews the strategy and risk appetite once a year. asset, the restoration costs are capitalised. The provision is a long-term provision, typically covering the leased asset term which is up to 13 years. a Fuel price risk The Group is exposed to fuel price risk. The Group’s fuel price risk management strategy aims to provide protection against Restructuring provisions sudden and significant increases in fuel prices while ensuring that the Group is not competitively disadvantaged in the event of a The restructuring provision includes provisions for voluntary redundancies including the collective redundancy programme for substantial fall in the price. The Group strategy is to hedge a proportion of fuel consumption for up to three years, within certain Iberia's Transformation Plan, which provides for payments to affected employees until they reach the statutory retirement age. defined limits. The amount provided for has been determined by an actuarial valuation made by independent actuaries, and was based on the Additional Information same assumptions as those made to determine the provisions for obligations to flight crew below, with the exception of the Within the strategy, the Financial Risk Management programme allows for the use of a number of derivatives instruments available discount rate, which in this case was 0.39 per cent. The payments related to this provision will continue over next ten years. on over the counter (OTC) markets with approved counterparties. During the year the Group recognised a provision of €136 million in relation to the restructuring plans at British Airways (note 4). The following table demonstrates the sensitivity of financial instruments to a reasonable possible change in fuel prices, with all The transformation programme has now been completed. other variables held constant, on result before tax and equity: At December 31, 2018, €682 million of this provision related to collective redundancy programmes (2017: €719 million). 2018 2017 Employee leaving indemnities and other employee related provisions Increase/(decrease) Effect on result Effect on Increase/(decrease) Effect on result Effect on in fuel price before tax equity in fuel price before tax equity This provision includes employees leaving indemnities relating to staff under various contractual arrangements. per cent € million € million per cent € million € million The Group recognises a provision relating to flight crew who having met certain conditions, have the option of being placed 30 0 1,613 30 41 1,142 on reserve and retaining their employment relationship until reaching the statutory retirement age, or taking early retirement. (30) (3) (1,695) (30) (48) (1,039) The Group is required to remunerate these employees until they reach the statutory retirement age, and an initial provision was recognised based on an actuarial valuation. The provision was reviewed at December 31, 2018 with the use of independent b Foreign currency risk actuaries using the projected unit credit method, based on a discount rate consistent with the iBoxx index of 1.59 per cent and The Group presents its consolidated financial statements in euros, has subsidiaries with functional currencies in euro and pound 0.39 per cent depending on whether the employees are currently active or not, the PERM/F-2000P mortality tables, and assuming sterling, and conducts business in a number of different countries. Consequently the Group is exposed to currency risk on revenue, a 1.50 per cent annual increase in the Consumer Price Index (CPI). This is mainly a long-term provision. The amount relating to this purchases and borrowings that are denominated in a currency other than the functional currency of the entity. The currencies in provision was €523 million at December 31, 2018 (2017: €542 million). which these transactions are denominated are primarily euro, US dollar and pound sterling. The Group generates a surplus in most currencies in which it does business. The US dollar is an exception as fuel purchases, maintenance expenses and debt repayments Legal claims provisions denominated in US dollars typically create a deficit. Legal claims provisions includes: The Group has a number of strategies to hedge foreign currency risk. The operational US dollar short position is subject to the • amounts for multi-party claims from groups or employees on a number of matters related to its operations, including claims same governance structure as the fuel hedging strategy set out above. The Group strategy, as approved by the IAG Management for additional holiday pay and for age discrimination; Committee, is to hedge a proportion of up to three years, within certain defined limits. • provisions related to tax assessments; and British Airways utilises its US dollar, euro, Japanese yen and Chinese yuan debt repayments as a hedge of future US dollar, euro, • amounts related to investigations by a number of competition authorities in connection with alleged anti-competitive activity Japanese yen and Chinese yuan revenues. Iberia’s balance sheet assets and liabilities in US dollars are hedged through a rolling concerning the Group’s passenger and cargo businesses. programme of swaps and US dollar financial assets that eliminate the profit and loss volatility arising from revaluation of these The final amount required to pay the remaining claims and fines is subject to uncertainty (note 31). items into euros. Vueling and Aer Lingus manage their net position in US dollars using derivative financial instruments. This provision includes the payment of €104 million for the reissued fine in March 2017 against British Airways, related to investigations by a number of competition authorities in connection with alleged anti-competitive activity concerning the Group's passenger and cargo businesses (note 31).

148 149 www.iairgroup.com 149 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

25 Financial risk management objectives and policies continued The following table demonstrates the sensitivity of the Group’s foreign exchange exposure to a reasonable possible change in the US dollar, sterling, Japanese yen and Chinese yuan exchange rates, with all other variables held constant, on result before tax and equity:

Strengthening Strengthening Strengthening Strengthening /(weakening) Effect on /(weakening) Effect on /(weakening) Effect on /(weakening) Effect on in US dollar result Effect on in pound result Effect on in Japanese result Effect on in Chinese result Effect on rate before tax equity sterling rate before tax equity yen rate before tax equity yuan rate before tax equity per cent € million € million per cent € million € million per cent € million € million per cent € million € million 2018 10 (16) (9) 10 (40) 262 10 (6) (54) 10 – (6) (10) 18 91 (10) 41 (273) (10) 1 54 (10) – 6

2017 10 (2) 253 10 (36) 232 10 (2) (45) 10 – (7) (10) 6 (72) (10) 35 (233) (10) 2 45 (10) – 7 c Interest rate risk The Group is exposed to changes in interest rates on debt and on cash deposits. Interest rate risk on floating rate debt is managed through interest rate swaps, cross currency swaps and interest rate collars. After taking into account the impact of these derivatives, 77 per cent of the Group's borrowings were at fixed rates and 23 per cent were at floating rates. All cash deposits are generally on tenors less than one year. The interest rate is predominantly fixed for the tenor of the deposit. The following table demonstrates the sensitivity of the Group’s interest rate exposure to a reasonable possible change in the US dollar, euro and pound sterling interest rates, on result before tax and equity:

Strengthening/ Strengthening/ Strengthening/ (weakening) in (weakening) in (weakening) in pound sterling US interest Effect on result euro interest Effect on result interest Effect on result rate before tax Effect on equity rate before tax Effect on equity rate before tax Effect on equity Basis points € million € million Basis points € million € million Basis points € million € million 2018 50 (1) 20 50 2 16 50 2 – (50) 1 (20) (50) (2) (25) (50) (2) –

2017 50 (1) – 50 (6) – 50 3 – (50) 1 – (50) 6 – (50) (3) – d Counterparty risk The Group is exposed to counterparty risk to the extent of non-performance by its counterparties in respect of financial assets receivable. The Group has policies and procedures in place to minimise the risk by placing credit limits on each counterparty. These policies and procedures are coordinated through IAG Group Treasury Policies. The Committee also reviews the application of the policies and procedures by British Airways, Iberia, Vueling and Aer Lingus. The Group monitors counterparty credit limits and defaults of counterparties, incorporating this information into credit risk controls. Treasury activities include placing money market deposits, fuel hedging and foreign currency transactions, which could lead to a concentration of different credit risks with the same counterparty. This risk is managed by allocation of exposure limits for the counterparty to British Airways, Iberia, Vueling and Aer Lingus. Exposures at the activity level are monitored on a daily basis and the overall exposure limit for the counterparty is reviewed at least monthly using available market information such as credit ratings. Sovereign risk is also monitored, country concentration and sovereign credit ratings are reviewed at every Group Treasury Committee meeting. Operating companies invest cash in interest-bearing accounts, time deposits, and money market funds, choosing instruments with appropriate maturities or liquidity to retain sufficient headroom. At the reporting date the operating companies held money market funds and other liquid assets that are expected to readily generate cash inflows for managing liquidity risk. The financial assets recognised in the financial statements, net of impairment losses, represent the Group’s maximum exposure to credit risk, without taking account of any guarantees in place or other credit enhancements. At December 31, 2018 the Group’s credit risk position, allocated by region, in respect of treasury managed cash and derivatives was as follows:

Mark-to-market of treasury controlled financial instruments allocated by geography Region 2018 2017 United Kingdom 42% 42% Spain – 1% Ireland 3% 2% Rest of Eurozone 33% 33% Rest of world 22% 22%

150 150 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

e Liquidity risk 25 Financial risk management objectives and policies continued Strategic Report Liquidity risk management includes maintaining sufficient cash and interest-bearing deposits, the availability of committed credit The following table demonstrates the sensitivity of the Group’s foreign exchange exposure to a reasonable possible change in facilities and the ability to close out market positions. the US dollar, sterling, Japanese yen and Chinese yuan exchange rates, with all other variables held constant, on result before tax and equity: At December 31, 2018 the Group had undrawn overdraft facilities of €11 million (2017: €16 million). The Group held undrawn

Strengthening Strengthening Strengthening Strengthening uncommitted money market lines of €28 million (2017: €28 million). /(weakening) Effect on /(weakening) Effect on /(weakening) Effect on /(weakening) Effect on in US dollar result Effect on in pound result Effect on in Japanese result Effect on in Chinese result Effect on The Group held undrawn general and committed aircraft financing facilities: rate before tax equity sterling rate before tax equity yen rate before tax equity yuan rate before tax equity per cent € million € million per cent € million € million per cent € million € million per cent € million € million 2018 2018 10 (16) (9) 10 (40) 262 10 (6) (54) 10 – (6) Million Currency € equivalent Corporate Governance (10) 18 91 (10) 41 (273) (10) 1 54 (10) – 6 Euro facilities expiring between January and June 2020 €131 131 US dollar facility expiring December 2021 $1,164 1,024 2017 10 (2) 253 10 (36) 232 10 (2) (45) 10 – (7) US dollar facility expiring June 2022 $1,044 918 (10) 6 (72) (10) 35 (233) (10) 2 45 (10) – 7 c Interest rate risk 2017 The Group is exposed to changes in interest rates on debt and on cash deposits. Million Currency € equivalent Euro facilities expiring between January and October 2018 €217 217 Interest rate risk on floating rate debt is managed through interest rate swaps, cross currency swaps and interest rate collars. US dollar facility expiring December 2021 $1,164 985 After taking into account the impact of these derivatives, 77 per cent of the Group's borrowings were at fixed rates and 23 per cent were at floating rates. US dollar facility expiring June 2022 $1,053 891

All cash deposits are generally on tenors less than one year. The interest rate is predominantly fixed for the tenor of the deposit. The following table categorises the Group’s (outflows) and inflows in respect of financial liabilities and derivative financial Financial Statements instruments into relevant maturity groupings based on the remaining period at December 31 to the contractual maturity date. The following table demonstrates the sensitivity of the Group’s interest rate exposure to a reasonable possible change in the US The amounts disclosed in the table are the contractual undiscounted cash flows and include interest. dollar, euro and pound sterling interest rates, on result before tax and equity: Within 6 6-12 1-2 2-5 More than 5 Total Strengthening/ € million months months years years years 2018 Strengthening/ Strengthening/ (weakening) in (weakening) in (weakening) in pound sterling Interest-bearing loans and borrowings: US interest Effect on result euro interest Effect on result interest Effect on result rate before tax Effect on equity rate before tax Effect on equity rate before tax Effect on equity Finance lease obligations (509) (367) (882) (2,304) (2,642) (6,704) Basis points € million € million Basis points € million € million Basis points € million € million 2018 50 (1) 20 50 2 16 50 2 – Fixed rate borrowings (53) (18) (533) (645) (58) (1,307) Floating rate borrowings (18) (67) (80) (93) (118) (376) (50) 1 (20) (50) (2) (25) (50) (2) –

Trade and other payables (3,591) – (13) – – (3,604) Additional Information

2017 50 (1) – 50 (6) – 50 3 – Derivative financial instruments (assets): (50) 1 – (50) 6 – (50) (3) – Interest rate derivatives 11 2 2 6 4 25 Foreign exchange contracts 69 58 122 72 – 321 d Counterparty risk Fuel derivatives 23 18 15 1 – 57 The Group is exposed to counterparty risk to the extent of non-performance by its counterparties in respect of financial assets Derivative financial instruments (liabilities): receivable. The Group has policies and procedures in place to minimise the risk by placing credit limits on each counterparty. These Interest rate derivatives (18) (7) (13) (16) (1) policies and procedures are coordinated through IAG Group Treasury Policies. The Committee also reviews the application of the (55) policies and procedures by British Airways, Iberia, Vueling and Aer Lingus. The Group monitors counterparty credit limits and Foreign exchange contracts (16) (8) (18) (16) – (58) defaults of counterparties, incorporating this information into credit risk controls. Treasury activities include placing money market Fuel derivatives (342) (290) (270) (110) – (1,012) deposits, fuel hedging and foreign currency transactions, which could lead to a concentration of different credit risks with the same December 31, 2018 (4,444) (679) (1,670) (3,105) (2,815) (12,713) counterparty. This risk is managed by allocation of exposure limits for the counterparty to British Airways, Iberia, Vueling and Aer

Lingus. Exposures at the activity level are monitored on a daily basis and the overall exposure limit for the counterparty is reviewed 6-12 1-2 2-5 Total at least monthly using available market information such as credit ratings. Sovereign risk is also monitored, country concentration Within 6 More than 5 € million months months years years years 2017 and sovereign credit ratings are reviewed at every Group Treasury Committee meeting. Interest-bearing loans and borrowings: Operating companies invest cash in interest-bearing accounts, time deposits, and money market funds, choosing instruments with Finance lease obligations (426) (449) (801) (1,982) (2,464) (6,122) appropriate maturities or liquidity to retain sufficient headroom. At the reporting date the operating companies held money market Fixed rate borrowings (31) (58) (99) (1,224) (77) (1,489) funds and other liquid assets that are expected to readily generate cash inflows for managing liquidity risk. Floating rate borrowings (29) (76) (85) (144) (150) (484) The financial assets recognised in the financial statements, net of impairment losses, represent the Group’s maximum exposure to Trade and other payables (3,411) – (15) – – (3,426) credit risk, without taking account of any guarantees in place or other credit enhancements. Derivative financial instruments (assets): At December 31, 2018 the Group’s credit risk position, allocated by region, in respect of treasury managed cash and derivatives was Interest rate derivatives – – 1 – – 1 as follows: Foreign exchange contracts 45 10 10 2 – 67 Mark-to-market of treasury Fuel derivatives 207 141 112 22 – 482 controlled financial instruments allocated by Derivative financial instruments (liabilities): geography Foreign exchange contracts (51) (58) (78) (36) – (223) Region 2018 2017 Fuel derivatives (2) – – – – (2) United Kingdom 42% 42% December 31, 2017 (3,698) (490) (955) (3,362) (2,691) (11,196) Spain – 1% Ireland 3% 2% Rest of Eurozone 33% 33% Rest of world 22% 22%

150 151 www.iairgroup.com 151 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

25 Financial risk management objectives and policies continued f Offsetting financial assets and liabilities The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements. The Group enters into derivative transactions under ISDA (International Swaps and Derivatives Association) documentation. In general, under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding are aggregated into a single net amount that is payable by one party to the other. December 31, 2018 Net Financial amounts of instruments financial Related that are instruments amounts Gross value offset under in the not offset in of financial netting balance the balance € million instruments agreements sheet sheet Net amount Financial assets Derivative financial assets 363 13 376 (7) 369

Financial liabilities Derivative financial liabilities 1,092 (13) 1,079 (7) 1,072

December 31, 2017 Net Financial amounts of instruments financial Related that are instruments amounts Gross value offset under in the not offset in of financial netting balance the balance € million instruments agreements sheet sheet Net amount Financial assets Derivative financial assets 551 (1) 550 (5) 545

Financial liabilities Derivative financial liabilities 226 (1) 225 (5) 220 g Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to maintain an optimal capital structure, to reduce the cost of capital and to provide returns to shareholders. The Group monitors capital on the basis of the adjusted net debt to EBITDAR ratio. For the year to December 31, 2018, the adjusted net debt to EBITDAR was 1.6 times (2017: 1.5 times). The definition and calculation for this performance measure is included in the Alternative performance measures section. Further detail on liquidity and capital resources and capital risk management is disclosed in the financial review.

152 152 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

25 Financial risk management objectives and policies continued 26 Financial instruments Strategic Report f Offsetting financial assets and liabilities a Financial assets and liabilities by category The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements and similar The detail of the Group’s financial instruments at December 31, 2018 and December 31, 2017 by nature and classification for agreements. measurement purposes is as follows: The Group enters into derivative transactions under ISDA (International Swaps and Derivatives Association) documentation. In December 31, 2018 general, under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding Financial assets are aggregated into a single net amount that is payable by one party to the other. Total Fair value Fair value carrying

December 31, 2018 through Other through Non- amount by Corporate Governance Net Amortised comprehensive Income financial balance Financial amounts of € million cost income statement assets sheet item instruments financial Related Non-current assets that are instruments amounts Gross value offset under in the not offset in Other equity investments – 80 – – 80 of financial netting balance the balance Derivative financial instruments – – 221 – 221 € million instruments agreements sheet sheet Net amount Other non-current assets 154 – – 155 309 Financial assets

Derivative financial assets 363 13 376 (7) 369 Current assets

Trade receivables 1,597 – – – 1,597 Financial liabilities Other current assets 444 – – 731 1,175

Derivative financial liabilities 1,092 (13) 1,079 (7) 1,072 Financial Statements Derivative financial instruments – – 155 – 155 December 31, 2017 Other current interest-bearing deposits 2,437 – – – 2,437 Net Cash and cash equivalents 3,837 – – – 3,837 Financial amounts of instruments financial Related that are instruments amounts Financial liabilities Gross value offset under in the not offset in of financial netting balance the balance Total Fair value Fair value € million instruments agreements sheet sheet Net amount carrying through Other through Non- amount by Financial assets Amortised comprehensive income financial balance

Derivative financial assets 551 (1) 550 (5) 545 € million cost income statement liabilities sheet item

Non-current liabilities Additional Information Interest-bearing long-term borrowings 6,633 – – – Financial liabilities 6,633

Derivative financial liabilities 226 (1) 225 (5) 220 Derivative financial instruments – – 423 – 423 Other long-term liabilities 13 – – 185 198 g Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to maintain Current liabilities an optimal capital structure, to reduce the cost of capital and to provide returns to shareholders. Current portion of long-term borrowings 876 – – – 876 The Group monitors capital on the basis of the adjusted net debt to EBITDAR ratio. For the year to December 31, 2018, the Trade and other payables 3,591 – – 368 3,959 adjusted net debt to EBITDAR was 1.6 times (2017: 1.5 times). The definition and calculation for this performance measure is Derivative financial instruments – – 656 – 656 included in the Alternative performance measures section. December 31, 2017 Further detail on liquidity and capital resources and capital risk management is disclosed in the financial review. Financial assets Total Fair value Fair value carrying through Other through Non- amount by Amortised comprehensive income financial balance € million cost income statement assets sheet item Non-current assets Other equity investments – 79 – – 79 Derivative financial instruments – – 145 – 145 Other non-current assets 200 – – 176 376

Current assets Trade receivables 1,463 – – – 1,463 Other current assets 337 – – 621 958 Derivative financial instruments – – 405 – 405 Other current interest-bearing deposits 3,384 – – – 3,384 Cash and cash equivalents 3,292 – – – 3,292

152 153 www.iairgroup.com 153 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

26 Financial instruments continued Financial liabilities Total Fair value Fair value carrying through Other through Non- amount by Amortised comprehensive Income financial balance € million cost income statement liabilities sheet item Non-current liabilities Interest-bearing long-term borrowings 6,401 – – – 6,401 Derivative financial instruments – – 114 – 114 Other long-term liabilities 15 – – 207 222

Current liabilities Current portion of long-term borrowings 930 – – – 930 Trade and other payables 3,411 – – 312 3,723 Derivative financial instruments – – 111 – 111 b Fair value of financial assets and financial liabilities The fair values of the Group’s financial instruments are disclosed in hierarchy levels depending on the nature of the inputs used in determining the fair values and using the following methods and assumptions as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Level 1 methodologies (market values at the balance sheet date) were used to determine the fair value of listed asset investments classified as equity investments and listed interest-bearing borrowings. Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The fair value of financial instruments that are not traded in an active market is determined by valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. Derivative intruments are measured based on the market value of instruments with similar terms and conditions at the balance sheet date using forward pricing models. Counterparty and own credit risk is deemed to be not significant. The fair value of the Group’s interest-bearing borrowings including leases is determined by discounting the remaining contractual cash flows at the relevant market interest rates at the balance sheet date. Level 3: Inputs for the asset or liability that are not based on observable market data. For unquoted investments, fair value has been determined based on the most recent arm’s length transaction for an identical instrument. The Group monitors transactions of these instruments on a regular basis to ensure the fair value is based on the most recent arm’s length price. The fair value of cash and cash equivalents, other current interest-bearing deposits, trade receivables, other current assets and trade and other payables approximate their carrying value largely due to the short-term maturities of these instruments. The carrying amounts and fair values of the Group’s financial assets and liabilities at December 31, 2018 are as follows:

Carrying Fair value value € million Level 1 Level 2 Level 3 Total Total Financial assets Other equity investments 17 – 63 80 80 Derivative financial assets: Interest rate derivatives1 – 12 – 12 12 Foreign exchange contracts1 – 321 – 321 321 Fuel derivatives1 – 43 – 43 43

Financial liabilities Interest-bearing loans and borrowings: Finance lease obligations – 6,086 – 6,086 5,928 Fixed rate borrowings 1,096 113 – 1,209 1,226 Floating rate borrowings – 355 – 355 355 Derivative financial liabilities: Interest rate derivatives2 – 43 – 43 43 Foreign exchange contracts2 – 54 – 54 54 Fuel derivatives2 – 982 – 982 982 1 Current portion of derivative financial assets is €155 million. 2 Current portion of derivative financial liabilities is €656 million.

154 154 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

The carrying amounts and fair values of the Group’s financial assets and liabilities at December 31, 2017 are set out below: 26 Financial instruments continued Strategic Report Financial liabilities Carrying Fair value value Total Fair value Fair value carrying € million Level 1 Level 2 Level 3 Total Total through Other through Non- amount by Financial assets Amortised comprehensive Income financial balance € million cost income statement liabilities sheet item Other equity investments 23 – 56 79 79 Non-current liabilities Derivative financial assets: 1 Interest-bearing long-term borrowings 6,401 – – – 6,401 Interest rate derivatives – 1 – 1 1 1 Derivative financial instruments – – 114 – 114 Foreign exchange contracts – 67 – 67 67 Corporate Governance 1 Other long-term liabilities 15 – – 207 222 Fuel derivatives – 482 – 482 482

Current liabilities Financial liabilities Current portion of long-term borrowings 930 – – – 930 Interest-bearing loans and borrowings: Trade and other payables 3,411 – – 312 3,723 Finance lease obligations – 5,639 – 5,639 5,507 Derivative financial instruments – – 111 – 111 Fixed rate borrowings 1,079 287 – 1,366 1,371 Floating rate borrowings – 453 – 453 453 b Fair value of financial assets and financial liabilities Derivative financial liabilities: The fair values of the Group’s financial instruments are disclosed in hierarchy levels depending on the nature of the inputs used in Foreign exchange contracts2 – 223 – 223 223 determining the fair values and using the following methods and assumptions as follows: Fuel derivatives2 – 2 – 2 2 Financial Statements Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. A market is regarded as active if quoted 1 Current portion of derivative financial assets is €405 million. prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Level 1 methodologies 2 Current portion of derivative financial liabilities is €111 million. (market values at the balance sheet date) were used to determine the fair value of listed asset investments classified as equity There have been no transfers between levels of fair value hierarchy during the year. investments and listed interest-bearing borrowings. The financial instruments listed in the previous table are measured at fair value in the consolidated financial statements, with the Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or exception of interest-bearing borrowings, which are measured at amortised cost. indirectly. The fair value of financial instruments that are not traded in an active market is determined by valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity c Level 3 financial assets reconciliation specific estimates. Derivative intruments are measured based on the market value of instruments with similar terms and conditions The following table summarises key movements in Level 3 financial assets:

at the balance sheet date using forward pricing models. Counterparty and own credit risk is deemed to be not significant. The fair Additional Information value of the Group’s interest-bearing borrowings including leases is determined by discounting the remaining contractual cash December 31, December 31, € million 2018 2017 flows at the relevant market interest rates at the balance sheet date. Opening balance for the year 56 58 Level 3: Inputs for the asset or liability that are not based on observable market data. For unquoted investments, fair value has Additions 8 1 been determined based on the most recent arm’s length transaction for an identical instrument. The Group monitors transactions Exchange movements (1) (3) of these instruments on a regular basis to ensure the fair value is based on the most recent arm’s length price. Closing balance for the year 63 56 The fair value of cash and cash equivalents, other current interest-bearing deposits, trade receivables, other current assets and trade and other payables approximate their carrying value largely due to the short-term maturities of these instruments. d Hedges The carrying amounts and fair values of the Group’s financial assets and liabilities at December 31, 2018 are as follows: Cash flow hedges At December 31, 2018 the Group’s principal risk management activities that were hedging future forecast transactions were: Carrying Fair value value • Future loan repayments in foreign currency (predominantly US dollar loan repayments), hedging foreign exchange fluctuations € million Level 1 Level 2 Level 3 Total Total on revenue cash inflows. Remeasurement gains and losses on the loans are recognised in equity and transferred to the income Financial assets statement within revenue when the loan is repaid (generally in instalments over the life of the loan). Other equity investments 17 – 63 80 80 • Foreign exchange contracts, hedging foreign currency exchange risk on revenue cash inflows and certain operational payments. Derivative financial assets: Remeasurement gains and losses on the derivatives are recognised in equity and transferred to the income statement or balance sheet to match against the related cash inflow or outflow. Interest rate derivatives1 – 12 – 12 12 • Forward crude, gas oil and jet kerosene derivative contracts, hedging price risk on fuel expenditure. Remeasurement gains and Foreign exchange contracts1 – 321 – 321 321 losses on the derivatives are recognised in equity and transferred to the income statement within fuel, oil costs and emissions Fuel derivatives1 – 43 – 43 43 charges to match against the related fuel cash outflow. • Interest rate contracts, hedging interest rate risk on floating rate debt and certain operational payments. Financial liabilities

Interest-bearing loans and borrowings: Finance lease obligations – 6,086 – 6,086 5,928 Fixed rate borrowings 1,096 113 – 1,209 1,226 Floating rate borrowings – 355 – 355 355 Derivative financial liabilities: Interest rate derivatives2 – 43 – 43 43 Foreign exchange contracts2 – 54 – 54 54 Fuel derivatives2 – 982 – 982 982 1 Current portion of derivative financial assets is €155 million. 2 Current portion of derivative financial liabilities is €656 million.

154 155 www.iairgroup.com 155 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

26 Financial instruments continued The amounts included in equity and the related notional amounts are summarised below, along with the analysis of gains and losses recognised in the year associated with these instruments:

(Gains)/losses in respect of cash flow hedges included within equity December 31, December 31, € million 2018 2017 Loan repayments to hedge future revenue 682 586 Foreign exchange contracts to hedge future revenue and expenditure1 (216) 163 Crude, gas oil and jet kerosene derivative contracts1 933 (474) Derivatives used to hedge interest rates1 34 – Instruments for which hedge accounting no longer applies1 22 – 1,455 275 Related tax credit (267) (44) Total amount included within equity 1,188 231

1 The carrying value of derivative instruments recognised in assets and liabilities is analysed in parts a and b above. Total Notional principal amounts Within 1 December (€ million) Hedge range year 1-2 years 2-5 years 31, 2018 Foreign exchange contracts to hedge future revenue and expenditure from US dollars to pound sterling1 1.22-1.50 1,982 1,858 1,685 5,525 Foreign exchange contracts to hedge future revenue and expenditure from US dollars to euros1 1.06-1.34 2,299 1,993 2,197 6,489 1 Represents the value of the hedged item. Crude, gas oil and jet kerosene derivative contracts are used to hedge fuel purchases over a period of up to three years. Notional quantities associated with these contracts at December 31, 2018 amounted to 14 million tonnes (2017: 8 million tonnes) with a hedge price range of USD469 – 787 (2017: USD388 – 725). The Group's loan repayment instalments used to hedge foreign currency risk on future revenue inflows were predominantly in US dollars and euros. At December 31, 2018 the related borrowings were $2,795 million (2017: $2,511 million); and €1,722 million (2017: €1,922 million).

(Gains)/losses (Gains)/losses associated with recognised in ineffectiveness Total Gains/(losses) Gains/(losses) Other recognised in recognised reclassified to reclassified to For the year to December 31, 2018 comprehensive the Income (gains)/ the Income the Balance (€ million) income1 statement2 losses statement sheet Loan repayments to hedge future revenue 208 – 208 (82) – Foreign exchange contracts to hedge future revenue and expenditure (387) – (387) 10 1 Crude, gas oil and jet kerosene derivative contracts 732 16 748 672 – Derivatives used to hedge interest rates 37 – 37 (2) – Instruments for which hedge accounting no longer applies 6 – 6 (2) – 596 16 612 596 1 1 Gains and losses recognised in Other comprehensive income represent gains and losses on the hedged items. 2 Ineffectiveness recognised in the Income statement is presented as Realised and Unrealised gains and losses on derivatives not qualifying for hedge accounting within other non-operating (charges)/credits.

156 156 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

Total continued Strategic Report 26 Financial instruments Notional principal amounts Within 1 December The amounts included in equity and the related notional amounts are summarised below, along with the analysis of gains and (€ million) Hedge range year 1-2 years 2-5 years 31, 2017 losses recognised in the year associated with these instruments: Foreign exchange contracts to hedge future revenue and expenditure from US dollars to pound sterling1 1.22-1.53 1,406 1,097 620 3,123 (Gains)/losses in respect of cash flow hedges included within equity December 31, December 31, € million 2018 2017 Foreign exchange contracts to hedge future revenue and expenditure from US dollars to euros1 1.04-1.27 1,212 985 582 2,779 Loan repayments to hedge future revenue 682 586 1 1 Represents the value of the hedged item. Foreign exchange contracts to hedge future revenue and expenditure (216) 163 Crude, gas oil and jet kerosene derivative contracts1 933 (474) (Gains)/losses Corporate Governance 1 (Gains)/losses associated with Derivatives used to hedge interest rates 34 – recognised in ineffectiveness Total Gains/(losses) Instruments for which hedge accounting no longer applies1 22 – Other recognised in recognised reclassified to For the year to December 31, 2017 comprehensive the Income (gains)/ the Income 1,455 275 (€ million) income1 statement2 losses statement3 Related tax credit (267) (44) Loan repayments to hedge future revenue (111) – (111) (87) Total amount included within equity 1,188 231 Foreign exchange contracts to hedge future revenue and 1 The carrying value of derivative instruments recognised in assets and liabilities is analysed in parts a and b above. expenditure 299 1 300 44 Total Crude, gas oil and jet kerosene derivative contracts (302) (9) (311) (4) Notional principal amounts Within 1 December Derivatives used to hedge interest rates (1) – (1) 2 (€ million) Hedge range year 1-2 years 2-5 years 31, 2018 (115) (8) (123) (45) Foreign exchange contracts to hedge future revenue and expenditure from US dollars to pound 1 Gains and losses recognised in Other comprehensive income represent gains and losses on the hedged items. Financial Statements sterling1 1.22-1.50 1,982 1,858 1,685 5,525 2 Ineffectiveness recognised in the Income statement is presented as Realised and Unrealised gains and losses on derivatives not qualifying for hedge Foreign exchange contracts to hedge future accounting within other non-operating (charges)/credits. revenue and expenditure from US dollars to euros1 1.06-1.34 2,299 1,993 2,197 6,489 3 For the year to December 31, 2017, there were no gains or losses reclassified to the Balance Sheet. 1 Represents the value of the hedged item. There is an economic relationship between the hedged items and the hedging instruments as the terms of the hedging instruments match the terms of the highly probable forecast transactions. The Group has established a hedge ratio of 1:1 for the hedging Crude, gas oil and jet kerosene derivative contracts are used to hedge fuel purchases over a period of up to three years. Notional relationships. quantities associated with these contracts at December 31, 2018 amounted to 14 million tonnes (2017: 8 million tonnes) with a hedge price range of USD469 – 787 (2017: USD388 – 725). The Group has no significant fair value hedges at December 31, 2018 and 2017. The Group's loan repayment instalments used to hedge foreign currency risk on future revenue inflows were predominantly in

US dollars and euros. At December 31, 2018 the related borrowings were $2,795 million (2017: $2,511 million); and €1,722 million 27 Share capital, share premium and treasury shares Additional Information (2017: €1,922 million). Ordinary Number of share Share (Gains)/losses shares capital premium (Gains)/losses associated with Alloted, called up and fully paid 000s € million € million recognised in ineffectiveness Total Gains/(losses) Gains/(losses) Other recognised in recognised reclassified to reclassified to January 1, 2018: Ordinary shares of €0.50 each 2,057,990 1,029 6,022 For the year to December 31, 2018 comprehensive the Income (gains)/ the Income the Balance Cancellation of ordinary shares of €0.50 each (65,957) (33) – (€ million) income1 statement2 losses statement sheet December 31, 2018 1,992,033 996 6,022 Loan repayments to hedge future revenue 208 – 208 (82) – Foreign exchange contracts to hedge future During the year IAG carried out a €500 million share buyback programme as part of its corporate finance strategy to return cash revenue and expenditure (387) – (387) 10 1 to shareholders. The programme was executed between May and October 2018 during which time IAG acquired and subsequently Crude, gas oil and jet kerosene derivative contracts 732 16 748 672 – cancelled 65,956,660 ordinary shares. A total of 1.2 million shares were issued to employees during the year as a result of vesting of Derivatives used to hedge interest rates 37 – 37 (2) – employee share schemes. At December 31, 2018 the Group held 8.7 million shares (2017: 9.9 million) which represented 0.44 per cent of the issued share capital of the Company. Instruments for which hedge accounting no longer applies 6 – 6 (2) – 596 16 612 596 1 1 Gains and losses recognised in Other comprehensive income represent gains and losses on the hedged items. 2 Ineffectiveness recognised in the Income statement is presented as Realised and Unrealised gains and losses on derivatives not qualifying for hedge accounting within other non-operating (charges)/credits.

156 157 www.iairgroup.com 157 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

28 Share-based payments The Group operates share-based payment schemes as part of the total remuneration package provided to employees. These schemes comprise both share option schemes where employees acquire shares at nil-cost and share award plans whereby shares are issued to employees at no cost, subject to the achievement by the Group of specified performance targets. a IAG Performance Share Plan The IAG Performance Share Plan (PSP) is granted to senior executives and managers of the Group who are most directly involved in shaping and delivering business success over the medium to long term. In 2014, a conditional award of shares was subject to the achievement of a variety of performance conditions, which vest after three years subject to the employee remaining employed by the Group. From 2015, the awards were made as nil-cost options, and also had a two-year additional holding period after the end of the performance period, before vesting takes place. The award made in 2014 vests based 50 per cent on achievement of IAG’s TSR performance targets relative to the MSCI European Transportation Index, and 50 per cent based on achievement of earnings per share targets. The awards made from 2015 will vest based one-third on achievement of IAG’s TSR performance targets relative to the MSCI European Transportation Index, one-third based on achievement of earnings per share targets, and one-third based on achievement of Return on Invested Capital targets. b IAG Incentive Award Deferral Plan The IAG Incentive Award Deferral Plan (IADP) is granted to qualifying employees based on performance and service tests. It will be awarded when an incentive award is triggered subject to the employee remaining in employment with the Group for three years after the grant date. The relevant population will receive 50 per cent of their incentive award up front in cash, and the remaining 50 per cent in shares after three years through the IADP. c Share-based payment schemes summary Vested and Outstanding Outstanding exercisable at January 1, Granted Lapsed Vested at December December 31, 2018 number number number 31, 2018 2018 ‘000s ‘000s ‘000s ‘000s ‘000s ‘000s Performance Share Plans 14,138 4,615 2,050 154 16,549 57 Incentive Award Deferral Plans 4,299 1,986 144 1,903 4,238 17 18,437 6,601 2,194 2,057 20,787 74 The fair value of equity-settled share-based payment plans determined using the Monte-Carlo valuation model, taking into account the terms and conditions upon which the plans were granted, used the following assumptions:

December 31, December 31, 2018 2017 Expected share price volatility (per cent) 35 35 Expected comparator group volatility (per cent) 20 20 Expected comparator correlation (per cent) 60 65 Expected life of options (years) 4.6 4.8 Weighted average share price at date of grant (£) 6.91 5.46 Weighted average fair value (£) 4.01 3.66 Volatility was calculated with reference to the Group’s weekly pound sterling share price volatility. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The fair value of the PSP also takes into account a market condition of TSR as compared to strategic competitors. No other features of share-based payment plans granted were incorporated into the measurement of fair value. The Group recognised a share-based payment charge of €31 million for the year to December 31, 2018 (2017: €34 million).

158 158 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

28 Share-based payments 29 Other reserves and non-controlling interest Strategic Report The Group operates share-based payment schemes as part of the total remuneration package provided to employees. These For the year to December 31, 2018 schemes comprise both share option schemes where employees acquire shares at nil-cost and share award plans whereby shares Other reserves are issued to employees at no cost, subject to the achievement by the Group of specified performance targets. Equity a IAG Performance Share Plan Unrealised portion of Redeemed Total Non- Retained gains and Time value Currency convertible Merger capital other controlling The IAG Performance Share Plan (PSP) is granted to senior executives and managers of the Group who are most directly involved € million earnings losses1 of options2 translation3 bond4 reserve5 reserve6 reserves interest7 in shaping and delivering business success over the medium to long term. In 2014, a conditional award of shares was subject to the January 1, 2018 2,278 (161) (3) (133) 101 (2,467) 37 (348) 307 achievement of a variety of performance conditions, which vest after three years subject to the employee remaining employed by the Group. From 2015, the awards were made as nil-cost options, and also had a two-year additional holding period after the end Corporate Governance of the performance period, before vesting takes place. The award made in 2014 vests based 50 per cent on achievement of IAG’s Profit for the year 2,885 – – – – – – 2,885 12 TSR performance targets relative to the MSCI European Transportation Index, and 50 per cent based on achievement of earnings per share targets. The awards made from 2015 will vest based one-third on achievement of IAG’s TSR performance targets relative Other comprehensive to the MSCI European Transportation Index, one-third based on achievement of earnings per share targets, and one-third based on income for the year achievement of Return on Invested Capital targets. Cash flow hedges b IAG Incentive Award Deferral Plan reclassified and reported in net profit: The IAG Incentive Award Deferral Plan (IADP) is granted to qualifying employees based on performance and service tests. It will be awarded when an incentive award is triggered subject to the employee remaining in employment with the Group for three Passenger revenue – 77 – – – – – 77 – years after the grant date. The relevant population will receive 50 per cent of their incentive award up front in cash, and the Fuel and oil costs – (565) – – – – – (565) – remaining 50 per cent in shares after three years through the IADP. Currency differences – 4 – – – – – 4 – Financial Statements c Share-based payment schemes summary Finance costs – 4 – – – – – 4 – Vested and Net change in fair value Outstanding Outstanding exercisable of cash flow hedges – (491) – – – – – (491) – at January 1, Granted Lapsed Vested at December December 31, Net change in fair value 2018 number number number 31, 2018 2018 ‘000s ‘000s ‘000s ‘000s ‘000s ‘000s of cost of hedging – – 13 – – – – 13 – Performance Share Plans 14,138 4,615 2,050 154 16,549 57 Net change in fair value of other equity Incentive Award Deferral Plans 4,299 1,986 144 1,903 4,238 17 investments – (5) – – – – – (5) – 18,437 6,601 2,194 2,057 20,787 74 Currency translation differences – – – (80) – – – (80) – The fair value of equity-settled share-based payment plans determined using the Monte-Carlo valuation model, taking into account Additional Information the terms and conditions upon which the plans were granted, used the following assumptions: Remeasurements of post-employment benefit December 31, December 31,

2018 2017 obligations (696) – – – – – – (696) – Expected share price volatility (per cent) 35 35 Hedges reclassified and Expected comparator group volatility (per cent) 20 20 reported in property, Expected comparator correlation (per cent) 60 65 plant and equipment – (1) – – – – – (1) – Expected life of options (years) 4.8 4.6 Cost of share-based Weighted average share price at date of grant (£) 6.91 5.46 payments 31 – – – – – – 31 – Weighted average fair value (£) 4.01 3.66 Vesting of share-based payment schemes (15) – – – – – – (15) – Volatility was calculated with reference to the Group’s weekly pound sterling share price volatility. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The fair Dividend (582) – – – – – – (582) – value of the PSP also takes into account a market condition of TSR as compared to strategic competitors. No other features of Cancellation of treasury share-based payment plans granted were incorporated into the measurement of fair value. shares (500) – – – – – 33 (467) – Dividend of a subsidiary – – – – – – – – (1) The Group recognised a share-based payment charge of €31 million for the year to December 31, 2018 (2017: €34 million). Transfer between reserves (77) – – 77 – – – – – Distributions made to holders of perpetual securities – – – – – – – – (312) December 31, 2018 3,324 (1,138) 10 (136) 101 (2,467) 70 (236) 6

158 159 www.iairgroup.com 159 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

29 Other reserves and non-controlling interests continued For the year to December 31, 2017

Other reserves Equity Unrealised Time portion of Redeemed Total Non- Retained gains and value of Currency convertible Merger capital other controlling € million earnings losses1 options2 translation3 bond4 reserve5 reserve6 reserves interest7 January 1, 2017 952 (299) – (6) 101 (2,467) – (1,719) 308 Restatement for adoption of new standards (468) – 38 – – – – (430) – January 1, 2017 (restated) 484 (299) 38 (6) 101 (2,467) – (2,149) 308 Profit for the year 1,989 – – – – – – 1,989 20

Other comprehensive income for the year Cash flow hedges reclassified and reported in net profit: Passenger revenue – 84 – – – – – 84 – Fuel and oil costs – (38) – – – – – (38) – Currency differences – (18) – – – – – (18) – Net change in fair value of cash flow hedges – 101 – – – – – 101 – Net change in fair value of cost of hedging – – (41) – – – – (41) – Net change in fair value of other equity investments – 9 – – – – – 9 – Currency translation differences – – – (127) – – – (127) – Remeasurements of post- employment benefit obligations 739 – – – – – – 739 –

Cost of share-based payments 34 – – – – – – 34 – Vesting of share-based payment schemes (33) – – – – – – (33) – Dividend (518) – – – – – – (518) – Cancellation of treasury shares (500) – – – – – 37 (463) – Dividend of a subsidiary – – – – – – – – (1) Transfer between reserves 83 – – – – – – 83 – Distributions made to holders of perpetual securities – – – – – – – – (20) December 31, 2017 2,278 (161) (3) (133) 101 (2,467) 37 (348) 307

1 The unrealised gains and losses reserve records fair value changes on equity investments and the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge. 2 The time value of options reserve records fair value changes on the cost of hedging. 3 The currency translation reserve records exchange differences arising from the translation of the financial statements of non-euro functional currency subsidiaries and investments accounted for under the equity method into the Group’s reporting currency of euros. The movement through this reserve in 2018 is affected by the fluctuations in the pound sterling to euro foreign exchange translation rate. 4 The equity portion of convertible bond reserve represents the equity portion of convertible bonds issued. At December 31, 2018, this related to the €500 million fixed rate 0.25 per cent convertible bond and the €500 million fixed rate 0.625 per cent convertible bond (note 22). 5 The merger reserve originated from the merger transaction between British Airways and Iberia. The balance represents the difference between the fair value of the Group on the transaction date, and the fair value of Iberia and the book value of British Airways (including its reserves). 6 The redeemed capital reserve represents the nominal value of the decrease in share capital, relating to cancelled shares. 7 On August 28, 2018, British Airways exercised its option to redeem its €300 million, 6.75 per cent fixed coupon preferred security which was previously classified as a non-controlling interest. The total non-controlling interest at December 31, 2018 is €6 million. At December 31, 2018, non-controlling interests represent the shares in British Airways Plc and IB Opco Holding, S.L. held by UK and Spanish entities respectively, established for the purpose of implementing the British Airways and Iberia nationality structures. The route licences granted by civil aviation authorities in the UK and Spain require that the majority of the voting rights in British Airways and Iberia are held by UK and Spanish nationals. These entities own the majority of the voting rights in British Airways Plc and IB Opco Holding, S.L., with IAG holding 99 per cent of the economic rights in these companies.

160 160 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

29 Other reserves and non-controlling interests continued 30 Employee benefit obligations Strategic Report For the year to December 31, 2017 The Group operates a variety of post-employment benefit arrangements, covering both defined contribution and defined benefit schemes. The Group also has a scheme for flight crew who meet certain conditions and therefore have the option of being placed Other reserves on reserve and retaining their employment relationship until reaching the statutory retirement age, or taking early retirement Equity (note 24). Unrealised Time portion of Redeemed Total Non- Retained gains and value of Currency convertible Merger capital other controlling Defined contribution schemes € million earnings losses1 options2 translation3 bond4 reserve5 reserve6 reserves interest7 The Group operates a number of defined contribution schemes for its employees. The defined contribution scheme British Airways January 1, 2017 952 (299) – (6) 101 (2,467) – (1,719) 308 Retirement Plan (BARP) was closed to future contributions on March 31, 2018. The BARP and NAPS schemes (see below) have Restatement for adoption been replaced by a flexible benefit scheme, incorporating a new defined contribution scheme that offers a choice of contribution Corporate Governance of new standards (468) – 38 – – – – (430) – rates and the ability to opt for cash instead of a pension. January 1, 2017 (restated) 484 (299) 38 (6) 101 (2,467) – (2,149) 308 Costs recognised in respect of defined contribution pension plans in Spain, UK and Ireland for the year to December 31, 2018 were Profit for the year 1,989 – – – – – – 1,989 20 €214 million (2017: €135 million).

Other comprehensive Defined benefit schemes income for the year i APS and NAPS Cash flow hedges The principal funded defined benefit pension schemes within the Group are the Airways Pension Scheme (APS) and the New reclassified and reported in Airways Pension Scheme (NAPS), both of which are in the UK and are closed to new members. NAPS was closed to future accrual net profit: from March 31, 2018, resulting in a reduction of the defined benefit obligation. Following closure members’ deferred pensions will Passenger revenue – 84 – – – – – 84 – now be increased annually by inflation up to five per cent per annum (measured using CPI), which is generally lower than the Financial Statements Fuel and oil costs – (38) – – – – – (38) – previous assumption for pay growth which included pay rises and promotions. NAPS members were offered a choice of transition Currency differences – (18) – – – – – (18) – arrangements, including non-cash options to increase their NAPS pensions prior to closure. The financial effect of the closure and the non-cash transition arrangements was a past service gain of €872 million which has been presented as an exceptional item Net change in fair value of net of transition costs of €192 million which were paid either directly to members or into their pension accounts. British Airways cash flow hedges – 101 – – – – – 101 – currently makes deficit contributions to NAPS of €333 million per annum until September 2027 plus additional contributions Net change in fair value of of up to €167 million per year depending on the cash balance at the end of March each year. As part of the closure of NAPS, cost of hedging – – (41) – – – – (41) – British Airways agreed to make certain additional transition payments to NAPS members if the deficit had reduced more than Net change in fair value of expected at either the 2018 or 2021 valuations. No allowance for such payments has been made in the valuation of the defined other equity investments – 9 – – – – – 9 – benefit obligation. Currency translation APS has been closed to new members since 1984. The benefits provided under APS are based on final average pensionable pay differences – – – (127) – – – (127) – and, for the majority of members, are subject to inflationary increases in payment in line with the Government's Pension Increase Additional Information Remeasurements of post- (Review) Orders (PIRO), which are based on CPI. employment benefit obligations 739 – – – – – – 739 – The Trustee of APS has proposed an additional discretionary increase above CPI inflation for pensions in payment for the year to March 31, 2014. British Airways challenged the decision and initiated legal proceedings to determine the legitimacy of the

discretionary increase. The High Court issued a judgement in May 2017, which determined that the Trustee had the power to Cost of share-based grant discretionary increases, whilst reiterating the Trustee must take into consideration all relevant factors, and ignore irrelevant payments 34 – – – – – – 34 – factors. British Airways appealed the judgement to the Court of Appeal. On July 5, 2018 the Court of Appeal released its Vesting of share-based judgement, upholding British Airways’ appeal, concluding the Trustee did not have the power to introduce a discretionary increase payment schemes (33) – – – – – – (33) – rule. Following the judgement, the Trustee was allowed permission to appeal to the Supreme Court; the Trustee has appealed. Dividend (518) – – – – – – (518) – The delayed 2015 triennial valuation will be completed once the outcome of the appeal is known. British Airways is committed Cancellation of treasury to an existing recovery plan, which sees deficit payments of €61 million per annum until March 2023. shares (500) – – – – – 37 (463) – APS and NAPS are governed by separate Trustee Boards, although much of the business of the two schemes is common. Dividend of a subsidiary – – – – – – – – (1) Most main Board and committee meetings are held in tandem although each Trustee Board reaches its decisions independently. Transfer between reserves 83 – – – – – – 83 – There are three sub committees which are separately responsible for the governance, operation and investments of each scheme. Distributions made to British Airways Pension Trustees Limited holds the assets of both schemes on behalf of their respective Trustees. holders of perpetual Deficit payment plans are agreed with the Trustees of each scheme every three years based on the actuarial valuation (triennial securities – – – – – – – – (20) valuation) rather than the IAS 19 accounting valuation. The latest deficit recovery plan was agreed on the March 31, 2012 position December 31, 2017 2,278 (161) (3) (133) 101 (2,467) 37 (348) 307 with respect to APS and March 31, 2015 with respect to NAPS (note 30i). The actuarial valuations performed at March 31, 2012 and March 31, 2015 are different to the valuation performed at December 31, 2018 under IAS 19 ‘Employee benefits’ mainly due to timing 1 The unrealised gains and losses reserve records fair value changes on equity investments and the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge. differences of the measurement dates and to the specific scheme assumptions in the actuarial valuation compared with IAS 19 guidance used in the accounting valuation assumptions. For example, IAS 19 requires the discount rate to be based on corporate 2 The time value of options reserve records fair value changes on the cost of hedging. bond yields regardless of how the assets are actually invested, which may not result in the calculations in this report being a best 3 The currency translation reserve records exchange differences arising from the translation of the financial statements of non-euro functional currency subsidiaries and investments accounted for under the equity method into the Group’s reporting currency of euros. The movement through this reserve in estimate of the cost to the Company of providing benefits under either Scheme. The investment strategy of each Scheme is likely 2018 is affected by the fluctuations in the pound sterling to euro foreign exchange translation rate. to change over its life, so the relationship between the discount rate and the expected rate of return on each Scheme’s assets may also change. 4 The equity portion of convertible bond reserve represents the equity portion of convertible bonds issued. At December 31, 2018, this related to the €500 million fixed rate 0.25 per cent convertible bond and the €500 million fixed rate 0.625 per cent convertible bond (note 22). ii Other plans 5 The merger reserve originated from the merger transaction between British Airways and Iberia. The balance represents the difference between the fair value of the Group on the transaction date, and the fair value of Iberia and the book value of British Airways (including its reserves). British Airways provides certain additional post-retirement healthcare benefits to eligible employees in the US through the US Post-Retirement Medical Benefit plan (US PRMB) which is considered to be a defined benefit scheme. In addition, Aer Lingus 6 The redeemed capital reserve represents the nominal value of the decrease in share capital, relating to cancelled shares. operates certain defined benefit plans, both funded and unfunded. 7 On August 28, 2018, British Airways exercised its option to redeem its €300 million, 6.75 per cent fixed coupon preferred security which was previously classified as a non-controlling interest. The total non-controlling interest at December 31, 2018 is €6 million. At December 31, 2018, non-controlling interests The defined benefit plans expose the Group to actuarial risks, such as longevity risk, interest rate risk, inflation risk, and market represent the shares in British Airways Plc and IB Opco Holding, S.L. held by UK and Spanish entities respectively, established for the purpose of (investment) risk including currency risk. implementing the British Airways and Iberia nationality structures. The route licences granted by civil aviation authorities in the UK and Spain require that the majority of the voting rights in British Airways and Iberia are held by UK and Spanish nationals. These entities own the majority of the voting rights in British Airways Plc and IB Opco Holding, S.L., with IAG holding 99 per cent of the economic rights in these companies.

160 161 www.iairgroup.com 161 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

30 Employee benefit obligations continued iii Cash payments Cash payments in respect to pension obligations comprise normal employer contributions by the Group; deficit contributions based on the agreed deficit payment plan with APS and NAPS; and cash sweep payments relating to additional payments made conditional on the level of cash in British Airways. Total payments for the year to December 31, 2018 net of service costs were €843 million (2017: €666 million) being the employer contributions of €716 million (2017: €899 million) less the current service cost of €55 million (2017: €233 million) (note 30b) and including payments made under transitional arrangements on the closure of NAPS to future accrual of €182 million. a Employee benefit schemes recognised on the Balance Sheet 2018 € million APS NAPS Other1 Total Scheme assets at fair value 8,372 18,846 382 27,600 Present value of scheme liabilities (7,110) (17,628) (645) (25,383) Net pension asset/(liability) 1,262 1,218 (263) 2,217 Effect of the asset ceiling2 (469) (896) – (1,365) Other employee benefit obligations – – (12) (12) December 31, 2018 793 322 (275) 840 Represented by: Employee benefit assets 1,129 Employee benefit obligations (289) 840

2017 € million APS NAPS Other1 Total Scheme assets at fair value 9,185 19,558 429 29,172 Present value of scheme liabilities (7,606) (20,060) (697) (28,363) Net pension asset/(liability) 1,579 (502) (268) 809 Effect of the asset ceiling2 (570) – – (570) Other employee benefit obligations – – (8) (8) December 31, 2017 1,009 (502) (276) 231 Represented by: Employee benefit assets 1,023 Employee benefit obligations (792) 231

1 The present value of scheme liabilities for the US PRMB was €13 million at December 31, 2018 (2017: €15 million). 2 APS and NAPS have an accounting surplus under IAS 19 (2017: APS only), which would be available to the Group as a refund upon wind up of the scheme. This refund is restricted due to withholding taxes that would be payable by the Trustee. b Amounts recognised in the Income statement Pension costs charged to operating result are:

€ million 2018 2017 Defined benefit plans: Current service cost 55 233 Past service (credit)/cost1 (586) 2 (531) 235 Defined contribution plans 214 135 Pension (credits)/costs recorded as employee costs (317) 370

1 Past service net credit in 2018 includes a gain arising on the closure of NAPS to future accrual, resulting in a one-off reduction in the defined benefit obligation of €872 million and associated transitional arrangement cash costs of €192 million. On October 26, 2018 the High Court’s judgement in the Lloyds Bank case confirmed that pension schemes are required to equalise for the effects of unequal GMPs accrued over the period since May 17, 1990. The estimated cost of equalising GMPs is €94 million. In determining the cost of equalising for GMPs, the Group has assumed that the Trustees will adopt Method C2 which was identified in the Lloyds judgement as the 'minimum interference' method which could be implemented without sponsor agreement. Pension costs (credited)/charged as finance costs are:

€ million 2018 2017 Interest income on scheme assets (731) (730) Interest expense on scheme liabilities 690 743 Interest expense on asset ceiling 14 15 Net financing (income)/expense relating to pensions (27) 28

162 162 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

c Remeasurements recognised in the Statement of other comprehensive income 30 Employee benefit obligations continued Strategic Report € million 2018 2017 iii Cash payments Return on plan assets excluding interest income 1,313 (1,698) Cash payments in respect to pension obligations comprise normal employer contributions by the Group; deficit contributions Remeasurement of plan liabilities from changes in financial assumptions (997) 530 based on the agreed deficit payment plan with APS and NAPS; and cash sweep payments relating to additional payments made conditional on the level of cash in British Airways. Total payments for the year to December 31, 2018 net of service costs were Remeasurement of experience (gains)/losses (297) 274 €843 million (2017: €666 million) being the employer contributions of €716 million (2017: €899 million) less the current service cost Remeasurement of the APS and NAPS asset ceilings 806 2 of €55 million (2017: €233 million) (note 30b) and including payments made under transitional arrangements on the closure of Exchange movements 5 (7) NAPS to future accrual of €182 million. Pension remeasurements charged/(credited) to Other comprehensive income 830 (899) Corporate Governance a Employee benefit schemes recognised on the Balance Sheet d Fair value of scheme assets 2018 A reconciliation of the opening and closing balances of the fair value of scheme assets is set out below: € million APS NAPS Other1 Total € million 2017 Scheme assets at fair value 8,372 18,846 382 27,600 2018 Present value of scheme liabilities (7,110) (17,628) (645) (25,383) January 1 29,172 28,448 Interest income 730 Net pension asset/(liability) 1,262 1,218 (263) 2,217 731 Return on plan assets excluding interest income 1,698 Effect of the asset ceiling2 (469) (896) – (1,365) (1,313) Employer contributions1 881 Other employee benefit obligations – – (12) (12) 716 Employee contributions 101 December 31, 2018 793 322 (275) 840 128 Benefits paid (1,340) (1,324) Represented by: Exchange movements (494) (1,362) Financial Statements Employee benefit assets 1,129 December 31 27,600 29,172 Employee benefit obligations (289) 840 1 Includes employer contributions to APS of €111 million (2017: €109 million) and to NAPS of €582 million (2017: €748 million), of which deficit funding payments represented €108 million for APS (2017: €104 million) and €509 million for NAPS (2017: €516 million).

For both APS and NAPS, the Trustee has ultimate responsibility for decision making on investments matters, including the asset- 2017 liability matching strategy. The latter is a form of investing designed to match the movement in pension plan assets with the € million APS NAPS Other1 Total movement in the projected benefit obligation over time. The Trustees’ investment committee adopts an annual business plan Scheme assets at fair value 9,185 19,558 429 29,172 which sets out investment objectives and work required to support achievement of these objectives. The committee also deals Present value of scheme liabilities (7,606) (20,060) (697) (28,363) with the monitoring of performance and activities, including work on developing the strategic benchmark to improve the risk Net pension asset/(liability) 1,579 (502) (268) 809 return profile of the scheme where possible, as well as having a trigger based dynamic governance process to be able to take Effect of the asset ceiling2 (570) – – (570) advantage of opportunities as they arise. The investment committee reviews the existing investment restrictions, performance Additional Information benchmarks and targets, as well as continuing to develop the de-risking and liability hedging portfolio. Other employee benefit obligations – – (8) (8) December 31, 2017 1,009 (502) (276) 231 Both schemes use derivative instruments for investment purposes and to manage exposures to financial risks, such as interest Represented by: rate, foreign exchange and liquidity risks arising in the normal course of business. Exposure to interest rate risk is managed through the use of Inflation-Linked Swap contracts. Foreign exchange forward contracts are entered into to mitigate the risk of currency Employee benefit assets 1,023 fluctuations. For NAPS, a strategy exists to provide protection against the equity market downside risk by reducing some of the Employee benefit obligations (792) upside participation. 231 Scheme assets held by all defined benefit schemes operated by the Group at December 31 comprise: 1 The present value of scheme liabilities for the US PRMB was €13 million at December 31, 2018 (2017: €15 million). € million 2018 2017 2 APS and NAPS have an accounting surplus under IAS 19 (2017: APS only), which would be available to the Group as a refund upon wind up of the scheme. This refund is restricted due to withholding taxes that would be payable by the Trustee. Return seeking investments – equities b Amounts recognised in the Income statement UK 1,737 2,646 Pension costs charged to operating result are: Rest of world 4,602 6,677 6,339 9,323 € million 2018 2017 Return seeking investments – other Defined benefit plans: Private equity 931 777 Current service cost 55 233 Property 1,917 1,906 Past service (credit)/cost1 (586) 2 Alternative investments 1,183 1,023 (531) 235 4,031 3,706 Defined contribution plans 214 135 Liability matching investments Pension (credits)/costs recorded as employee costs (317) 370 UK fixed bonds 4,885 4,885 1 Past service net credit in 2018 includes a gain arising on the closure of NAPS to future accrual, resulting in a one-off reduction in the defined benefit obligation Rest of world fixed bonds 70 95 of €872 million and associated transitional arrangement cash costs of €192 million. On October 26, 2018 the High Court’s judgement in the Lloyds Bank case confirmed that pension schemes are required to equalise for the effects of unequal GMPs accrued over the period since May 17, 1990. The estimated cost of UK index-linked bonds 5,019 7,614 equalising GMPs is €94 million. In determining the cost of equalising for GMPs, the Group has assumed that the Trustees will adopt Method C2 which was Rest of world index-linked bonds 103 177 identified in the Lloyds judgement as the 'minimum interference' method which could be implemented without sponsor agreement. 10,077 12,771 Pension costs (credited)/charged as finance costs are: Other € million 2018 2017 Cash and cash equivalents 418 670 Interest income on scheme assets (731) (730) Derivatives 57 178 Interest expense on scheme liabilities 690 743 Insurance contract 1,663 1,770 Interest expense on asset ceiling 14 15 Longevity swap 4,321 (109) Net financing (income)/expense relating to pensions (27) 28 Other 694 863 27,600 29,172 All equities and bonds have quoted prices in active markets.

162 163 www.iairgroup.com 163 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

30 Employee benefit obligations continued For APS and NAPS, the composition of the scheme assets is:

December 31, 2018 December 31, 2017 € million APS NAPS APS NAPS Return seeking investments 702 9,477 742 12,074 Liability matching investments 1,538 8,457 6,428 6,240 2,240 17,934 7,170 18,314 Insurance contract and related longevity swap 5,956 – 1,637 – Other 176 912 378 1,244 Fair value of scheme assets 8,372 18,846 9,185 19,558 The strategic benchmark for asset allocations differentiate between ‘return seeking assets’ and ‘liability matching assets’. Given the respective maturity of each scheme, the proportion for APS and NAPS vary. At December 31, 2018, the benchmark for APS was 8 per cent (2017: 9.5 per cent) in return seeking assets and 92 per cent (2017: 90.5 per cent) in liability matching investments; and for NAPS the benchmark was 49 per cent (2017: 65 per cent) in return seeking assets and 51 per cent (2017: 35 per cent) in liability matching investments. Bandwidths are set around these strategic benchmarks that allow for tactical asset allocation decisions, providing parameters for the investment committee and its investment managers to work within. In addition to this, APS has an insurance contract with Rothesay Life which covers 24 per cent (2017: 24 per cent) of the pensioner liabilities for an agreed list of members. The insurance contract is based on future increases to pensions in line with inflation and will match future obligations on that basis for that part of the scheme. The insurance contract can only be used to pay or fund employee benefits under the scheme. The Trustee of APS also has secured a longevity swap contract with Rothesay Life, which covers an additional 20 per cent (2017: 20 per cent) of the pensioner liabilities for the same members covered by the insurance contract above. The value of the contract is based on the difference between the value of the payments expected to be received under this contract and the pensions payable by the scheme under the contract. During 2018 the Trustee of APS secured a buy-in contract with Legal & General and at the same time novated the two longevity swaps established in 2017 one with Canada Life and one with Partner Reinsurance which had covered 13 per cent and 8 per cent respectively of the pensioner liabilities. The buy-in contract covers all members in receipt of pension from APS at March 31, 2018, excluding dependent children receiving a pension at that date and members in receipt of equivalent pension (EPB) only benefits, who are alive on October 1, 2018. Benefits coming into payment for retirements after March 31, 2018 are not covered. The contract covers benefits payable from October 1, 2018 onwards. The policy covers approximately 60 per cent of all benefits APS expects to pay out in future. Along with existing insurance products (the asset swap and longevity swaps with Rothesay Life), APS is now 90 per cent protected against all longevity risk and fully protected in relation to all pensions that were already being paid as at March 31, 2018. It is also more than 90 per cent protected against interest rates and inflation (on a Retail Price Index (RPI) basis). e Present value of scheme liabilities A reconciliation of the opening and closing balances of the present value of the defined benefit obligations is set out below:

€ million 2018 2017 January 1 28,363 29,193 Current service cost 55 233 Past service (credit)/cost (778) 2 Interest expense 690 743 Remeasurements - financial assumptions (997) 530 Remeasurements of experience (gains)/losses (297) 274 Benefits paid (1,340) (1,324) Employee contributions 128 101 Exchange movements (441) (1,389) December 31 25,383 28,363 The defined benefit obligation comprises €36 million (2017: €28 million) arising from unfunded plans and €25,347 million (2017: €28,335 million) from plans that are wholly or partly funded. f Effect of the asset ceiling A reconciliation of the effect of the asset ceiling used in calculating the IAS 19 irrecoverable surplus in APS and NAPS is set out below:

€ million 2018 2017 January 1 570 580 Interest expense 14 15 Remeasurements1 806 2 Exchange movements (25) (27) December 31 1,365 570

1 The increase in remeasurements is mainly due to the closure of NAPS to future accrual in 2018. Following this the scheme is now in an IAS 19 accounting surplus, which would be available to the company as a refund upon wind up of the scheme. This refund is restricted due to withholding taxes that would be payable by the Trustee.

164 164 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

30 Employee benefit obligations continued g Actuarial assumptions Strategic Report The principal assumptions used for the purposes of the actuarial valuations were as follows: For APS and NAPS, the composition of the scheme assets is: 2018 2017 December 31, 2018 December 31, 2017 Other Other € million APS NAPS APS NAPS Per cent per annum APS NAPS schemes APS NAPS schemes Return seeking investments 702 9,477 742 12,074 Discount rate1 2.65 2.85 1.6 - 4.4 2.45 2.55 1.6 - 3.6 Liability matching investments 1,538 8,457 6,428 6,240 Rate of increase in pensionable pay2 3.20 – 2.5 - 3.7 3.15 3.15 2.5 - 3.6 2,240 17,934 7,170 18,314 Rate of increase of pensions in payment3 2.10 2.05 1.5 - 3.8 2.05 2.05 0.0 - 3.5

Insurance contract and related longevity swap 5,956 – 1,637 – RPI rate of inflation 3.20 3.15 2.5 - 3.2 3.15 3.15 2.5 - 3.1 Corporate Governance Other 176 912 378 1,244 CPI rate of inflation 2.10 2.05 1.5 - 3.0 2.05 2.05 1.75 - 3.0 Fair value of scheme assets 8,372 18,846 9,185 19,558 1 Discount rate is determined by reference to the yield on high quality corporate bonds of currency and term consistent with the scheme liabilities. The strategic benchmark for asset allocations differentiate between ‘return seeking assets’ and ‘liability matching assets’. Given 2 Rate of increase in pensionable pay is assumed to be in line with long-term market inflation expectations. The inflation rate assumptions for NAPS and APS the respective maturity of each scheme, the proportion for APS and NAPS vary. At December 31, 2018, the benchmark for APS was are based on the difference between the yields on index-linked and fixed-interest long-term government bonds. 8 per cent (2017: 9.5 per cent) in return seeking assets and 92 per cent (2017: 90.5 per cent) in liability matching investments; and 3 It has been assumed that the rate of increase of pensions in payment will be in line with CPI for APS and NAPS. The Trustee of the Airways Pension Scheme for NAPS the benchmark was 49 per cent (2017: 65 per cent) in return seeking assets and 51 per cent (2017: 35 per cent) in liability (APS) had proposed an additional discretionary increase above CPI for pensions in payment for the year ended March 31, 2014. British Airways challenged the decision and initiated legal proceedings to determine the legitimacy of the discretionary increase. The High Court issued a judgement in May 2017, which matching investments. Bandwidths are set around these strategic benchmarks that allow for tactical asset allocation decisions, determined that the Trustee had the power to grant discretionary increases, whilst reiterating the Trustee must take into consideration all relevant factors, providing parameters for the investment committee and its investment managers to work within. and ignore irrelevant factors. British Airways appealed the judgement to the Court of Appeal. On July 5, 2018 the Court of Appeal released its judgement, upholding British Airways’ appeal, concluding the Trustee did not have the power to introduce a discretionary increase rule. Following the July 2018 In addition to this, APS has an insurance contract with Rothesay Life which covers 24 per cent (2017: 24 per cent) of the pensioner judgement, the Trustee has appealed to the Supreme Court. The proposed discretionary increase is not included in the assumptions above.

liabilities for an agreed list of members. The insurance contract is based on future increases to pensions in line with inflation and Financial Statements Rate of increase in healthcare costs is based on medical trend rates of 6.25 per cent grading down to 5.0 per cent over five years will match future obligations on that basis for that part of the scheme. The insurance contract can only be used to pay or fund (2017: 6.5 per cent to 5.0 per cent over seven years). employee benefits under the scheme. The Trustee of APS also has secured a longevity swap contract with Rothesay Life, which covers an additional 20 per cent (2017: 20 per cent) of the pensioner liabilities for the same members covered by the insurance In the UK, mortality rates are calculated using the standard SAPS mortality tables produced by the CMI for APS and NAPS. The contract above. The value of the contract is based on the difference between the value of the payments expected to be received standard mortality tables were selected based on the actual recent mortality experience of members and were adjusted to allow under this contract and the pensions payable by the scheme under the contract. for future mortality changes. The current longevities underlying the values of the scheme liabilities were as follows:

During 2018 the Trustee of APS secured a buy-in contract with Legal & General and at the same time novated the two longevity Mortality assumptions 2018 2017 swaps established in 2017 one with Canada Life and one with Partner Reinsurance which had covered 13 per cent and 8 per cent Life expectancy at age 60 for a: respectively of the pensioner liabilities. The buy-in contract covers all members in receipt of pension from APS at March 31, 2018, – male currently aged 60 28.5 28.4 excluding dependent children receiving a pension at that date and members in receipt of equivalent pension (EPB) only benefits, who are alive on October 1, 2018. Benefits coming into payment for retirements after March 31, 2018 are not covered. The contract – male currently aged 40 29.7 29.7 covers benefits payable from October 1, 2018 onwards. The policy covers approximately 60 per cent of all benefits APS expects – female currently aged 60 30.3 30.2 Additional Information to pay out in future. Along with existing insurance products (the asset swap and longevity swaps with Rothesay Life), APS is now – female currently aged 40 32.9 32.8 90 per cent protected against all longevity risk and fully protected in relation to all pensions that were already being paid as at March 31, 2018. It is also more than 90 per cent protected against interest rates and inflation (on a Retail Price Index (RPI) basis). At December 31, 2018, the weighted-average duration of the defined benefit obligation was 11 years for APS (2017: 12 years) and 19 years for NAPS (2017: 20 years). e Present value of scheme liabilities In the US, mortality rates were based on the RP-14 mortality tables. A reconciliation of the opening and closing balances of the present value of the defined benefit obligations is set out below: h Sensitivity analysis € million 2018 2017 Reasonable possible changes at the reporting date to significant actuarial assumptions, holding other assumptions constant, would January 1 28,363 29,193 have affected the present value of scheme liabilities by the amounts shown: Current service cost 55 233 Past service (credit)/cost (778) 2 Increase/(decrease) in scheme liabilities Interest expense 743 Other 690 € million APS NAPS schemes Remeasurements - financial assumptions (997) 530 Discount rate (decrease of 10 basis points) 11 322 13 Remeasurements of experience (gains)/losses (297) 274 Future salary growth (increase of 10 basis points) – n/a 7 Benefits paid (1,340) (1,324) Future pension growth (increase of 10 basis points) 11 322 1 Employee contributions 128 101 Future mortality rate (one year increase in life expectancy) (23) 511 2 Exchange movements (441) (1,389) December 31 25,383 28,363 Although the analysis does not take into account the full distribution of cash flows expected under the plan, it does provide an approximation of the sensitivity of the assumptions shown. The defined benefit obligation comprises €36 million (2017: €28 million) arising from unfunded plans and €25,347 million (2017: €28,335 million) from plans that are wholly or partly funded. i Funding Pension contributions for APS and NAPS were determined by actuarial valuations made at March 31, 2012 and March 31, 2015 f Effect of the asset ceiling respectively, using assumptions and methodologies agreed between the Group and Trustee of each scheme. At the date of the A reconciliation of the effect of the asset ceiling used in calculating the IAS 19 irrecoverable surplus in APS and NAPS is set out actuarial valuation, the actuarial deficits of APS and NAPS amounted to €932 million and €3,818 million respectively. In order to below: address the deficits in the schemes, the Group has also committed to the following undiscounted deficit payments:

€ million 2018 2017 € million APS NAPS January 1 570 580 Within 12 months 61 333 Interest expense 14 15 2-5 years 199 1,333 Remeasurements1 806 2 5-10 years – 1,250 Exchange movements (25) (27) Total expected deficit payments for APS and NAPS 260 2,916 December 31 1,365 570 The Group has determined that the minimum funding requirements set out above for APS and NAPS will not be restricted. The 1 The increase in remeasurements is mainly due to the closure of NAPS to future accrual in 2018. Following this the scheme is now in an IAS 19 accounting present value of the contributions payable is expected to be available as a refund or a reduction in future contributions after they surplus, which would be available to the company as a refund upon wind up of the scheme. This refund is restricted due to withholding taxes that would be are paid into the plan. This determination has been made independently for each plan, subject to withholding taxes that would be payable by the Trustee. payable by the Trustee.

164 165 www.iairgroup.com 165 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

30 Employee benefit obligations continued Deficit payments in respect of local arrangements outside of the UK have been determined in accordance with local practice. In total, the Group expects to pay €398 million in employer contributions and deficit payments to the two significant post- retirement benefit plans in 2019. This is made up of €61 million and €333 million of deficit payments for APS and NAPS respectively as agreed at the latest triennial valuations. In addition, ongoing employer contributions for 2019 are expected to be €4 million for APS. This excludes any additional deficit contribution that may become due depending on British Airways' cash balance as at March 31, 2019. The Group also expects to pay €278 million in 2019, having provided collateral on certain payments to the Company’s pension scheme, APS and NAPS, which at December 31, 2018 amounted to €278 million (2017: €283 million). This amount is payable because the pension schemes are not fully funded on a conservative basis, with a gilts-based discount rate on January 1, 2019 as determined by the scheme actuary. Until September 2019, if British Airways pays a dividend to IAG higher than 35 per cent of profit after tax it will either provide the scheme with a guarantee for 100 per cent of the amount above 35 per cent or 50 per cent of that amount as an additional cash contribution.

31 Contingent liabilities and guarantees The Group has certain contingent liabilities which at December 31, 2018 amounted to €88 million (December 31, 2017: €93 million). No material losses are likely to arise from such contingent liabilities. The Group also has the following claims: Cargo The European Commission issued a decision in which it found that British Airways, and 10 other airline groups, had engaged in cartel activity in the air cargo sector (Original Decision). British Airways was fined €104 million. Following an appeal, the decision was subsequently partially annulled against British Airways (and annulled in full against the other appealing airlines) (General Counsel Judgement), and the fine was refunded in full. British Airways appealed the partial annulment to the Court of Justice, but that appeal was rejected. In parallel, the European Commission chose not to appeal the General Counsel Judgement, and instead adopted a new decision in March 2017 (New Decision). The New Decision re-issued fines against all the participating carriers, which match those contained in the Original Decision. British Airways has therefore again been fined €104 million. British Airways has appealed the New Decision to the GC again (as have other carriers). A large number of claimants have brought proceedings in the English courts to recover damages from British Airways which, relying on the findings in the Commission decisions, they claim arise from the alleged cartel activity. British Airways joined the other airlines alleged to have participated in cartel activity to those proceedings to contribute. A number of those claims were concluded in 2018. British Airways is also party to similar litigation in a number of other jurisdictions including Germany, the Netherlands and Canada together with a number of other airlines. At present, the outcome of the proceedings is unknown. In each case, the precise effect, if any, of the alleged cartelising activity on the claimants will need to be assessed. Pensions The Trustees of the Airways Pension Scheme (APS) had proposed an additional discretionary increase above CPI for pensions in payment for the year to March 31, 2014. British Airways challenged the decision and initiated legal proceedings to determine the legitimacy of the discretionary increase. The outcome of the legal proceedings was issued in May 2017, which concluded the Trustees had the power to grant discretionary increases, whilst reiterating they must take into consideration all relevant factors, and ignore irrelevant factors. The Group appealed the judgement to the Court of Appeal. On July 5, 2018 the Court of Appeal released its judgement, upholding British Airways' appeal, concluding the Trustee did not have the power to introduce a discretionary increase rule. British Airways will not have to reflect the increase in liabilities of €13 million that would have applied had the proposed increase for the 2013/14 scheme year been paid by the Trustee. The Trustee has appealed to the Supreme Court. Theft of customer data at British Airways On September 6, 2018 British Airways announced the theft of certain of its customers’ personal data. Following an investigation into the theft, British Airways announced on October 25, 2018 that further personal data had potentially been compromised. As at the date of this report, BA was not aware of any confirmed cases of fraud. British Airways continues to cooperate with the investigations of the UK Information Commissioner’s Office and other relevant regulators. British Airways has received letters before action from certain UK law firms threatening claims arising from the data breach. Additionally, a putative class action has been filed in the Eastern District of New York, USA. The outcome of the various investigations and litigation, which British Airways will vigorously defend, is uncertain. British Airways holds certain insurance policies. Guarantees British Airways has provided collateral on certain payments to its pension schemes, APS and NAPS, which at December 31, 2018 amounted to €278 million (December 31, 2017: €283 million). This amount would be payable in the event that the pension schemes are not fully funded on a conservative basis with a gilts-based discount rate on January 1, 2019 and will be determined by the scheme actuary. In addition, a guarantee amounting to €256 million (2017: €260 million) was issued by a third party in favour of APS, triggered in the event of British Airways’ insolvency. The Group also has other guarantees and indemnities entered into as part of the normal course of business, which at December 31, 2018 are not expected to result in material losses for the Group.

166 166 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

30 Employee benefit obligations continued 32 Related party transactions Strategic Report Deficit payments in respect of local arrangements outside of the UK have been determined in accordance with local practice. The following transactions took place with related parties for the financial years to December 31:

In total, the Group expects to pay €398 million in employer contributions and deficit payments to the two significant post- € million 2018 2017 retirement benefit plans in 2019. This is made up of €61 million and €333 million of deficit payments for APS and NAPS respectively Sales of goods and services as agreed at the latest triennial valuations. In addition, ongoing employer contributions for 2019 are expected to be €4 million for Sales to associates1 7 7 APS. This excludes any additional deficit contribution that may become due depending on British Airways' cash balance as at Sales to significant shareholders2 44 48 March 31, 2019. The Group also expects to pay €278 million in 2019, having provided collateral on certain payments to the Company’s pension scheme, APS and NAPS, which at December 31, 2018 amounted to €278 million (2017: €283 million). This amount is payable because the pension schemes are not fully funded on a conservative basis, with a gilts-based discount rate Purchases of goods and services Corporate Governance on January 1, 2019 as determined by the scheme actuary. Purchases from associates3 55 58 Until September 2019, if British Airways pays a dividend to IAG higher than 35 per cent of profit after tax it will either provide Purchases from significant shareholders2 121 109 the scheme with a guarantee for 100 per cent of the amount above 35 per cent or 50 per cent of that amount as an additional cash contribution. Receivables from related parties Amounts owed by associates4 7 2 31 Contingent liabilities and guarantees Amounts owed by significant shareholders5 3 1 The Group has certain contingent liabilities which at December 31, 2018 amounted to €88 million (December 31, 2017: €93 million). No material losses are likely to arise from such contingent liabilities. The Group also has the following claims: Payables to related parties 6 Cargo Amounts owed to associates 3 3

5 Financial Statements The European Commission issued a decision in which it found that British Airways, and 10 other airline groups, had engaged in Amounts owed to significant shareholders 7 3 cartel activity in the air cargo sector (Original Decision). British Airways was fined €104 million. Following an appeal, the decision 1 Sales to associates: Consisted primarily of sales for airline related services to Dunwoody Airline Services (Holding) Limited (Dunwoody) of €5 million was subsequently partially annulled against British Airways (and annulled in full against the other appealing airlines) (General (2017: €6 million) and €1 million (2017: less than €1 million) to Iberia Cards (Sociedad Conjunta para la Emisión y Gestión de Medios de Pago E.F.C., S.A.) Counsel Judgement), and the fine was refunded in full. British Airways appealed the partial annulment to the Court of Justice, but and Serpista, S.A. that appeal was rejected. 2 Sales to and purchases from significant shareholders: Related to interline services and wet leases with Qatar Airways. 3 Purchases from associates: Mainly included €35 million of airport auxiliary services purchased from Multiservicios Aeroportuarios, S.A. (2017: €35 million), €6 In parallel, the European Commission chose not to appeal the General Counsel Judgement, and instead adopted a new decision million of handling services provided by Dunwoody (2017: €13 million) and €13 million of maintenance services received from Serpista, S.L. (2017: €9 million). in March 2017 (New Decision). The New Decision re-issued fines against all the participating carriers, which match those contained 4 Amounts owed by associates: For airline related services rendered, that included balances with Dunwoody of €5 million (2017: €1 million) and €2 million of in the Original Decision. British Airways has therefore again been fined €104 million. British Airways has appealed the New Decision services provided to Multiservicios Aeroportuarios, S.A., Viajes AME, S.A., Iberia Cards (Sociedad Conjunta para la Emisión y Gestión de Medios de Pago to the GC again (as have other carriers). E.F.C., S.A.) and Empresa Hispano Cubana de Mantenimiento de Aeronaves, Ibeca, S.A. (2017: €1m for Multiservicios Aeroportuarios, S.A., Serpista, S.A. and Empresa Hispano Cubana de Mantenimiento de Aeronaves, Ibeca, S.A.).

A large number of claimants have brought proceedings in the English courts to recover damages from British Airways which, Additional Information relying on the findings in the Commission decisions, they claim arise from the alleged cartel activity. British Airways joined the 5 Amounts owed by and to significant shareholders: Related to Qatar Airways. other airlines alleged to have participated in cartel activity to those proceedings to contribute. A number of those claims were 6 Amounts owed to associates: Consisted primarily of less than €1 million due to Dunwoody (2017: €1 million), €3 million to Serpista, S.A. (2017: €2 million) concluded in 2018. and less than €1 million to Multiservicios Aeroportuarios, S.A. (2017: less than €1 million). During the year to December 31, 2018 British Airways met certain costs of administering its retirement benefit plans, including British Airways is also party to similar litigation in a number of other jurisdictions including Germany, the Netherlands and Canada the provision of support services to the Trustees. Costs borne on behalf of the retirement benefit plans amounted to €9.5 million together with a number of other airlines. At present, the outcome of the proceedings is unknown. In each case, the precise effect, if any, of the alleged cartelising activity on the claimants will need to be assessed. (2017: €7 million) in relation to the costs of the Pension Protection Fund levy.

Pensions The Group has transactions with related parties that are conducted in the normal course of the airline business, which include The Trustees of the Airways Pension Scheme (APS) had proposed an additional discretionary increase above CPI for pensions the provision of airline and related services. All such transactions are carried out on an arm’s length basis. in payment for the year to March 31, 2014. British Airways challenged the decision and initiated legal proceedings to determine the legitimacy of the discretionary increase. The outcome of the legal proceedings was issued in May 2017, which concluded the For the year to December 31, 2018, the Group has not made any provision for doubtful debts arising relating to amounts owed Trustees had the power to grant discretionary increases, whilst reiterating they must take into consideration all relevant factors, by related parties (2017: nil). and ignore irrelevant factors. The Group appealed the judgement to the Court of Appeal. On July 5, 2018 the Court of Appeal released its judgement, upholding British Airways' appeal, concluding the Trustee did not have the power to introduce a discretionary increase rule. British Airways will not have to reflect the increase in liabilities of €13 million that would have applied Significant shareholders had the proposed increase for the 2013/14 scheme year been paid by the Trustee. The Trustee has appealed to the Supreme Court. In this instance, significant shareholders are those parties who have the power to participate in the financial and operating policy decisions of the Group, as a result of their shareholdings in the Group, but who do not have control over these policies. Theft of customer data at British Airways On September 6, 2018 British Airways announced the theft of certain of its customers’ personal data. Following an investigation At December 31, 2018 the Group had cash deposit balances with shareholders holding a participation of between 3 to 5 per cent, into the theft, British Airways announced on October 25, 2018 that further personal data had potentially been compromised. of €98 million (2017: €90 million). As at the date of this report, BA was not aware of any confirmed cases of fraud. British Airways continues to cooperate with the investigations of the UK Information Commissioner’s Office and other relevant regulators. British Airways has received letters Board of Directors and Management Committee remuneration before action from certain UK law firms threatening claims arising from the data breach. Additionally, a putative class action has Compensation received by the Group’s Board of Directors and Management Committee, in 2018 and 2017 is as follows: been filed in the Eastern District of New York, USA. The outcome of the various investigations and litigation, which British Airways will vigorously defend, is uncertain. British Airways holds certain insurance policies. Year to December 31 € million 2018 2017 Guarantees Base salary, fees and benefits British Airways has provided collateral on certain payments to its pension schemes, APS and NAPS, which at December 31, 2018 Board of Directors amounted to €278 million (December 31, 2017: €283 million). This amount would be payable in the event that the pension schemes are not fully funded on a conservative basis with a gilts-based discount rate on January 1, 2019 and will be determined by the Short-term benefits (cash) 5 6 scheme actuary. Share based payments 2 3 Post employment and termination benefits – In addition, a guarantee amounting to €256 million (2017: €260 million) was issued by a third party in favour of APS, triggered in – the event of British Airways’ insolvency. Management Committee Short-term benefits (cash) 10 10 The Group also has other guarantees and indemnities entered into as part of the normal course of business, which at December 31, Share based payments 7 2018 are not expected to result in material losses for the Group. 5 Post employment and termination benefits – –

166 167 www.iairgroup.com 167 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

32 Related party transactions continued At December 31, 2018 the Board of Directors includes remuneration for two Executive Directors (December 31, 2017: two Executive Directors). The Management Committee includes remuneration for ten members (December 31, 2017: nine members). The Company provides life insurance for all executive directors and the Management Committee. For the year to December 31, 2018 the Company's obligation was €58,000 (2017: €38,000). At December 31, 2018 the transfer value of accrued pensions covered under defined benefit pension obligation schemes, relating to the current members of the Management Committee totalled €4 million (2017 : €4 million). No loan or credit transactions were outstanding with Directors or offices of the Group at December 31, 2018 (2017: nil).

33 Changes to accounting policies The Group has adopted IFRS 15 ‘Revenue from contracts with customers’ from January 1, 2018. The standard establishes a five-step model that applies to revenue arising from contracts with customers. Revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for goods and services and at a point when the performance obligations associated with these goods and services have been satisfied. The Group has identified the following changes to revenue recognition on adoption of the standard: • Loyalty revenue – revenue associated with performance obligations arising on the sale of loyalty points, including revenue allocated to brand and marketing services and revenue allocated to Avios points, has been determined based on the relative stand-alone selling price of each performance obligation. Revenue associated with brand and marketing services is recognised as the points are issued. Revenue allocated to the Avios points is deferred and recognised when the points are redeemed. The impact of assessing the stand-alone selling prices of the individual performance obligations has resulted in a greater portion of revenue being deferred on issuance, because the stand-alone selling price of the points was higher than the fair value applied under IFRIC 13 ‘Customer loyalty programmes’. On implementation of IFRS 15, the Group assessed all contracts associated with the loyalty programmes at the date of initial application. This resulted in an increase in the number of points deferred in respect of incomplete contracts and which are expected to be redeemed in the future. The Group also changed the way that costs associated with the redemption of Avios points with third parties are presented. The revenue arising from these transactions is presented net of the related costs as IAG’s obligation is to arrange for goods and services to be provided by third party suppliers. • Passenger revenue – revenue associated with ancillary services that was previously recognised when paid, such as administration fees, is deferred to align with the recognition of revenue associated with the related travel. • Cargo revenue – interline cargo revenue is presented gross rather than net of related costs as IAG is considered to have a performance obligation to provide cargo services to its customers, rather than an obligation to arrange cargo services to be provided by third parties. • Other revenue – revenue associated with maintenance activities and holiday revenue with performance obligations that are fulfilled over time, is recognised over the performance obligation period using a methodology that reflects the activity undertaken in order to satisfy the obligation. The Group has applied the standard on a fully retrospective basis and restated prior year comparatives on adoption of IFRS 15. Practical expedients have not been used. The adjustment to opening retained earnings at January 1, 2017 arising from the changes to loyalty revenue recognition amounted to a charge of €403 million. Deferred revenue on ticket sales increased by €497 million and the net tax asset increased by €94 million. Other changes to revenue recognition resulted in a charge to retained earnings at January 1, 2017 of €27 million. The Group has adopted IFRS 9 ‘Financial Instruments’ from January 1, 2018. The standard amends the classification and measurement models for financial assets and adds new requirements to address the impairment of financial assets. It also introduces a new hedge accounting model to more closely align hedge accounting with risk management strategy and objectives. The Group has identified the following changes to the classification and measurement of financial assets and accounting for derivative instruments used for hedging. • Equity investments, previously classified as available-for-sale, are measured at fair value through Other comprehensive income, with no recycling of gains and losses. In addition, the Group has adopted a new impairment model for trade receivables and other financial assets, with no material adjustment to existing provisions. The Group will continue to recognise most financial assets at amortised cost as the contractual cash flows associated with these assets are solely payments of principal and interest. • The Group continues to undertake hedging activity in line with its financial risk management objectives and policies. Movements in the time value of options are now classified as cost of hedging and recognised in Other comprehensive income, with prior year comparatives restated. At January 1, 2017 there was a reclassification of €38 million of post-tax gains from retained earnings to unrealised net gains in Other reserves to reflect the reclassification of gains and losses associated with the time value of options. Movements in the time value of options recognised in Other comprehensive income in 2017 are set out in note 29.

168 168 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

Impact on financial statements 32 Related party transactions continued Strategic Report The following tables summarise the impact of adopting IFRS 15 and IFRS 9 on the Consolidated income statement for the At December 31, 2018 the Board of Directors includes remuneration for two Executive Directors (December 31, 2017: two Executive 12 months to December 31, 2017 and the Consolidated balance sheet as at December 31, 2017 and January 1, 2017. Directors). The Management Committee includes remuneration for ten members (December 31, 2017: nine members). Consolidated income statement (extract for the 12 months to December 31, 2017) The Company provides life insurance for all executive directors and the Management Committee. For the year to December 31, 2018 the Company's obligation was €58,000 (2017: €38,000). IFRS 15 Previously Loyalty IFRS 9 At December 31, 2018 the transfer value of accrued pensions covered under defined benefit pension obligation schemes, relating € million reported revenue Other adjustments Restated to the current members of the Management Committee totalled €4 million (2017 : €4 million). Passenger revenue 20,245 51 (11) – 20,285

No loan or credit transactions were outstanding with Directors or offices of the Group at December 31, 2018 (2017: nil). Cargo revenue 1,084 – 48 – 1,132 Corporate Governance Other revenue 1,643 (181) 1 – 1,463 33 Changes to accounting policies Total revenue 22,972 (130) 38 – 22,880 Handling, catering and other operating costs 2,714 (69) 42 – 2,687 The Group has adopted IFRS 15 ‘Revenue from contracts with customers’ from January 1, 2018. The standard establishes a five-step model that applies to revenue arising from contracts with customers. Revenue is recognised at an amount that reflects Other expenditure on operations 17,531 – – – 17,531 the consideration to which an entity expects to be entitled in exchange for goods and services and at a point when the Total expenditure on operations 20,245 (69) 42 – 20,218 performance obligations associated with these goods and services have been satisfied. Operating profit 2,727 (61) (4) – 2,662 The Group has identified the following changes to revenue recognition on adoption of the standard: Unrealised (losses)/gains on derivatives not qualifying for hedge • Loyalty revenue – revenue associated with performance obligations arising on the sale of loyalty points, including revenue accounting (14) – – 42 28 allocated to brand and marketing services and revenue allocated to Avios points, has been determined based on the relative stand-alone selling price of each performance obligation. Revenue associated with brand and marketing services is recognised Net currency retranslation credits 27 – – 11 38 Financial Statements as the points are issued. Revenue allocated to the Avios points is deferred and recognised when the points are redeemed. The Other non-operating items (247) – – – (247) impact of assessing the stand-alone selling prices of the individual performance obligations has resulted in a greater portion of Profit before tax 2,493 (61) (4) 53 2,481 revenue being deferred on issuance, because the stand-alone selling price of the points was higher than the fair value applied Tax (472) 11 1 (12) (472) under IFRIC 13 ‘Customer loyalty programmes’. Profit after tax for the year 2,021 (50) (3) 41 2,009 On implementation of IFRS 15, the Group assessed all contracts associated with the loyalty programmes at the date of initial application. This resulted in an increase in the number of points deferred in respect of incomplete contracts and which are Basic earnings per share (€ cents) 95.8 (2.5) – 1.9 95.2 expected to be redeemed in the future. Diluted earnings per share (€ cents) 92.6 (2.4) – 1.8 92.0 The Group also changed the way that costs associated with the redemption of Avios points with third parties are presented. Consolidated balance sheet (extract as at December 31, 2017) The revenue arising from these transactions is presented net of the related costs as IAG’s obligation is to arrange for goods and IFRS 15 Additional Information services to be provided by third party suppliers. Previously Loyalty • Passenger revenue – revenue associated with ancillary services that was previously recognised when paid, such as administration € million reported revenue Other Restated fees, is deferred to align with the recognition of revenue associated with the related travel. Non-current assets • Cargo revenue – interline cargo revenue is presented gross rather than net of related costs as IAG is considered to have a Deferred tax assets 521 – 2 523 performance obligation to provide cargo services to its customers, rather than an obligation to arrange cargo services to be Other non-current assets 16,517 – – 16,517 provided by third parties. 17,038 – 2 17,040 • Other revenue – revenue associated with maintenance activities and holiday revenue with performance obligations that are Current assets fulfilled over time, is recognised over the performance obligation period using a methodology that reflects the activity undertaken in order to satisfy the obligation. Trade receivables 1,494 – (31) 1,463 Other current assets 8,729 – – 8,729 The Group has applied the standard on a fully retrospective basis and restated prior year comparatives on adoption of IFRS 15. 10,223 – (31) 10,192 Practical expedients have not been used. The adjustment to opening retained earnings at January 1, 2017 arising from the changes to loyalty revenue recognition amounted to a charge of €403 million. Deferred revenue on ticket sales increased by €497 million Total assets 27,261 – (29) 27,232 and the net tax asset increased by €94 million. Other changes to revenue recognition resulted in a charge to retained earnings at January 1, 2017 of €27 million. Total equity 7,396 (432) (31) 6,933 The Group has adopted IFRS 9 ‘Financial Instruments’ from January 1, 2018. The standard amends the classification and measurement models for financial assets and adds new requirements to address the impairment of financial assets. It also Non-current liabilities introduces a new hedge accounting model to more closely align hedge accounting with risk management strategy and objectives. Deferred tax liability 531 – (5) 526 The Group has identified the following changes to the classification and measurement of financial assets and accounting for Other non-current liabilities 9,642 – – derivative instruments used for hedging. 9,642 10,173 – (5) 10,168 Equity investments, previously classified as available-for-sale, are measured at fair value through Other comprehensive income, • Current liabilities with no recycling of gains and losses. In addition, the Group has adopted a new impairment model for trade receivables and other financial assets, with no material adjustment to existing provisions. The Group will continue to recognise most financial Trade and other payables 3,766 – (43) 3,723 assets at amortised cost as the contractual cash flows associated with these assets are solely payments of principal and interest. Deferred revenue on ticket sales 4,159 533 50 4,742 • The Group continues to undertake hedging activity in line with its financial risk management objectives and policies. Movements Current tax payable 179 (101) – 78 in the time value of options are now classified as cost of hedging and recognised in Other comprehensive income, with prior year Other current liabilities 1,588 – – 1,588 comparatives restated. At January 1, 2017 there was a reclassification of €38 million of post-tax gains from retained earnings to 9,692 432 7 10,131 unrealised net gains in Other reserves to reflect the reclassification of gains and losses associated with the time value of options. Movements in the time value of options recognised in Other comprehensive income in 2017 are set out in note 29. Total liabilities 19,865 432 2 20,299 Total equity and liabilities 27,261 – (29) 27,232

168 169 www.iairgroup.com 169 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

33 Changes to accounting policies continued Consolidated balance sheet (extract as at January 1, 2017) IFRS 15 Previously Loyalty € million reported revenue Other Restated Non-current assets Deferred tax assets 526 33 2 561 Other non-current assets 17,062 – – 17,062 17,588 33 2 17,623 Current assets Trade receivables 1,405 – (35) 1,370 Other current assets 8,380 – – 8,380 9,785 – (35) 9,750 Total assets 27,373 33 (33) 27,373

Total equity 5,664 (403) (27) 5,234

Non-current liabilities Deferred tax liability 176 (61) (5) 110 Other non-current liabilities 12,197 – – 12,197 12,373 (61) (5) 12,307 Current liabilities Trade and other payables 3,305 – (39) 3,266 Deferred revenue on ticket sales 4,145 497 38 4,680 Other current liabilities 1,886 – – 1,886 9,336 497 (1) 9,832 Total liabilities 21,709 436 (6) 22,139 Total equity and liabilities 27,373 33 (33) 27,373 The Group has not adopted any other standards, amendments or interpretations in the 12 months to December 31, 2018 that have had a significant change to its financial performance or position. IFRS 16 ‘Leases’ will be adopted by the Group from January 1, 2019. The new standard eliminates the classification of leases as either operating leases or finance leases and introduces a single lessee accounting model. The Group has a number of operating leases for assets including aircraft, property and other equipment. The main changes arising on the adoption of IFRS 16 will be as follows: 1. Interest-bearing borrowings and non-current assets will increase on implementation of the standard as obligations to make future payments under leases currently classified as operating leases will be recognised on the Balance sheet, along with the related ‘right-of-use’ (ROU) asset. The Group has opted to use the practical expedients in respect of leases of less than 12 months duration and leases for low value items and excluded them from the scope of IFRS 16. Rental payments associated with these leases will be recognised in the Income statement on a straight-line basis over the life of the lease. 2. There will be a reduction in expenditure on operations and an increase in finance costs as operating lease costs are replaced with depreciation and lease interest expense. 3. The adoption of IFRS 16 will require the Group to make a number of judgements, estimates and assumptions. These include: – The approach to be adopted on transition. The Group will use the modified retrospective transition approach. Lease liabilities will be determined based on the appropriate incremental borrowing rates and rates of exchange at the date of transition (January 1, 2019). ROU assets in respect of aircraft will be measured at the appropriate incremental borrowing rates at the date of transition and rates of exchange at the commencement of each lease, and will be depreciated from the lease commencement date to the date of transition. Other ROU assets will be measured based on the related lease liability. IFRS 16 does not allow comparative information to be restated if the modified retrospective transition approach is used. – The estimated lease term. The term of each lease will be based on the original lease term unless management is ‘reasonably certain’ to exercise options to extend the lease. Further information used to determine the appropriate lease term includes fleet plans which underpin approved business plans, and historic experience regarding extension options. – The discount rate used to determine the lease liability. The rates used on transition to discount future lease payments are the Group’s incremental borrowing rates. These rates have been calculated for each airline, reflecting the underlying lease terms and based on observable inputs. The risk-free rate component has been based on LIBOR rates available in the same currency and over the same term as the lease and has been adjusted for credit risk. For future lease obligations, the Group is proposing to use the interest rate implicit in the lease. – Terminal arrangements. The Group has reviewed its arrangements at airport terminals to determine whether any agreements previously considered to be service agreements should be classified as leases. No additional leases have been identified following this review.

170 170 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED For the year to December 31, 2018

– Restoration obligations. The Group has identified certain obligations associated with the maintenance condition of its aircraft 33 Changes to accounting policies continued Strategic Report on redelivery to the lessor, such as the requirement to complete a final airframe check, repaint the aircraft and reconfigure Consolidated balance sheet (extract as at January 1, 2017) the cabin. These have been recognised as part of the ROU asset on transition. Judgement has been used to identify the IFRS 15 appropriate obligations and estimation has been used (based observable data) to measure them. Other maintenance Previously Loyalty obligations associated with these assets, comprising obligations that arise as the aircraft is utilised, such as engine overhauls € million reported revenue Other Restated and periodic airframe checks, will continue to be recognised as a maintenance expense over the lease term. Non-current assets 4. For future reporting periods after adoption, foreign exchange movements on lease obligations, which are predominantly Deferred tax assets 526 33 2 561 denominated in US dollars, will be remeasured at each balance sheet date, however the ROU asset will be recognised at Other non-current assets 17,062 – – 17,062 the historic exchange rate. This will create volatility in the Income statement. The Group intends to manage this volatility

as part of its risk management strategy. Corporate Governance 17,588 33 2 17,623 Current assets The Group expects that the following assets and liabilities will be recognised on the Consolidated balance sheet at January 1, 2019 on adoption of IFRS 16 (rounded to the nearest €5 million): Trade receivables 1,405 – (35) 1,370 Other current assets 8,380 – – 8,380 Consolidated balance sheet (extract as at January 1, 2019) 9,785 – (35) 9,750 Preliminary As IFRS 16 Total assets 27,373 33 (33) 27,373 € Million reported adjustments Restated Non-current assets Total equity 5,664 (403) (27) 5,234 Property, plant and equipment Fleet 10,790 3,730 14,520 Non-current liabilities Property and equipment 1,647 755 2,402 Financial Statements Deferred tax liability 176 (61) (5) 110 Deferred tax assets 536 130 666 Other non-current liabilities 12,197 – – 12,197 Other non-current assets 4,968 – 4,968 12,373 (61) (5) 12,307 17,941 4,615 22,556 Current liabilities Current assets Trade and other payables 3,305 – (39) 3,266 Other current assets 10,093 (35) 10,058 Deferred revenue on ticket sales 4,145 497 38 4,680 10,093 (35) 10,058 Other current liabilities 1,886 – – 1,886 Total assets 28,034 4,580 32,614 9,336 497 (1) 9,832 Total liabilities 21,709 436 (6) 22,139 Total equity 6,720 (550) 6,170 Additional Information Total equity and liabilities 27,373 33 (33) 27,373 The Group has not adopted any other standards, amendments or interpretations in the 12 months to December 31, 2018 that have Non-current liabilities had a significant change to its financial performance or position. Interest-bearing long-term borrowings 6,633 4,315 10,948 IFRS 16 ‘Leases’ will be adopted by the Group from January 1, 2019. The new standard eliminates the classification of leases as Deferred tax liability 453 (40) 413 either operating leases or finance leases and introduces a single lessee accounting model. The Group has a number of operating Provisions for liabilities and charges 2,268 120 2,388 leases for assets including aircraft, property and other equipment. Other non-current liabilities 910 (125) 785 The main changes arising on the adoption of IFRS 16 will be as follows: 10,264 4,270 14,534 Current liabilities 1. Interest-bearing borrowings and non-current assets will increase on implementation of the standard as obligations to Current portion of long term borrowings 876 880 make future payments under leases currently classified as operating leases will be recognised on the Balance sheet, along 1,756 with the related ‘right-of-use’ (ROU) asset. The Group has opted to use the practical expedients in respect of leases of less Other current liabilities 10,174 (20) 10,154 than 12 months duration and leases for low value items and excluded them from the scope of IFRS 16. Rental payments 11,050 860 11,910 associated with these leases will be recognised in the Income statement on a straight-line basis over the life of the lease. Total liabilities 21,314 5,130 26,444 2. There will be a reduction in expenditure on operations and an increase in finance costs as operating lease costs are Total equity and liabilities 28,034 4,580 32,614 replaced with depreciation and lease interest expense.

3. The adoption of IFRS 16 will require the Group to make a number of judgements, estimates and assumptions. These include: – The approach to be adopted on transition. The Group will use the modified retrospective transition approach. Lease liabilities will be determined based on the appropriate incremental borrowing rates and rates of exchange at the date of transition (January 1, 2019). ROU assets in respect of aircraft will be measured at the appropriate incremental borrowing rates at the date of transition and rates of exchange at the commencement of each lease, and will be depreciated from the lease commencement date to the date of transition. Other ROU assets will be measured based on the related lease liability. IFRS 16 does not allow comparative information to be restated if the modified retrospective transition approach is used. – The estimated lease term. The term of each lease will be based on the original lease term unless management is ‘reasonably certain’ to exercise options to extend the lease. Further information used to determine the appropriate lease term includes fleet plans which underpin approved business plans, and historic experience regarding extension options. – The discount rate used to determine the lease liability. The rates used on transition to discount future lease payments are the Group’s incremental borrowing rates. These rates have been calculated for each airline, reflecting the underlying lease terms and based on observable inputs. The risk-free rate component has been based on LIBOR rates available in the same currency and over the same term as the lease and has been adjusted for credit risk. For future lease obligations, the Group is proposing to use the interest rate implicit in the lease. – Terminal arrangements. The Group has reviewed its arrangements at airport terminals to determine whether any agreements previously considered to be service agreements should be classified as leases. No additional leases have been identified following this review.

170 171 www.iairgroup.com 171 GROUP INVESTMENTS

Subsidiaries British Airways Country of Percentage of Name and address Principal activity Incorporation equity owned Avios Group (AGL) Limited * Astral Towers, Betts Way, London Road, Crawley, West Sussex, RH10 9XY Airline marketing England 100% BA and AA Holdings Limited * Waterside, PO Box 365, Harmondsworth, UB7 0GB Holding company England 100% BA Call Centre India Private Limited (callBA) F-42, East of Kailash, New Delhi, 110065 India 100% BA Cityflyer Limited * Waterside, PO Box 365, Harmondsworth, UB7 0GB Airline operations England 100% BA European Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% BA Heathcare Trust Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% BA Number One Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% BA Number Two Limited IFC 5, St Helier, Jersey, JE1 1ST Jersey 100% Bealine Plc Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% BritAir Holdings Limited * Waterside, PO Box 365, Harmondsworth, UB7 0GB Holding company England 100% British Airways (BA) Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% British Airways 777 Leasing Limited * Waterside, PO Box 365, Harmondsworth, UB7 0GB Aircraft leasing England 100% British Airways Associated Companies Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% British Airways Avionic Engineering Limited * Waterside, PO Box 365, Harmondsworth, UB7 0GB Aircraft maintenance England 100% British Airways Capital Limited Queensway House, Hilgrove Street, St Helier, JE1 1ES Jersey 100% British Airways E-Jets Leasing Limited * Canon's Court, 22 Victoria Street, Hamilton, HM 12 Aircraft financing Bermuda 100% British Airways Holdings BV Strawinskylaan 3105, Atrium, Amsterdam, 1077ZX Netherlands 100% British Airways Holdings Limited * IFC 5, St Helier, Jersey, JE1 1ST Holding company Jersey 100% British Airways Holidays Limited * Waterside, PO Box 365, Harmondsworth, UB7 0GB Package holidays England 100% British Airways Interior Engineering Limited * Waterside, PO Box 365, Harmondsworth, UB7 0GB Aircraft maintenance England 100% British Airways Leasing Limited * Waterside, PO Box 365, Harmondsworth, UB7 0GB Aircraft financing England 100% British Airways Maintenance Cardiff Limited * Waterside, PO Box 365, Harmondsworth, UB7 0GB Aircraft maintenance England 100% British Airways Pension Trustees (No 2) Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% British Mediterranean Airways Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 99% British Midland Airways Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% British Midland Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% Diamond Insurance Company Limited 1st Floor, Rose House, 51-59 Circular Road, Douglas, IM1 1RE Isle of Man 100% Flyline Tele Sales & Services GmbH Hermann Koehl-Strasse 3, Bremen, 28199 Germany 100% Gatwick Ground Services Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% Illiad Inc Suite 1300, 1105 North Market Street, PO Box 8985, Wilmington, Delaware, 19899 USA 100%

172 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Country of Percentage of Strategic Report Name and address Principal activity Incorporation equity owned Overseas Air Travel Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% Speedbird Insurance Company Limited * Canon's Court, 22 Victoria Street, Hamilton, HM 12 Insurance Bermuda 100% Teleflight Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% BA Excepted Group Life Scheme Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% Corporate Governance Iberia Country of Percentage of Name and address Principal activity Incorporation equity owned Compañía Operadora de Corto y Medio Radio Iberia Express, S.A.* Calle Alcañiz 23, Madrid, 28006 Airline operations Spain 100% Compañía Explotación Aviones Cargueros Cargosur, S.A. Calle Martínez Villergas 49, Madrid, 28027 Spain 100% Compañía Auxiliar al Cargo Exprés, S.A.* Centro de Carga Aérea, Parcela 2 P5, Nave 6, Madrid, 28042 Cargo transport Spain 75%

Sociedad Auxiliar Logística Aeroportuaria, S.A.* Airport logistics and cargo Financial Statements Centro de Carga Aérea, Parcela 2 P5, Nave 6, Madrid, 28042 terminal management Spain 75% Iberia Tecnología, S.A.* Calle Martínez Villergas 49, Madrid, 28027 Holding company Spain 100% Iberia Desarrollo Barcelona, S.L.* Avinguda Les Garrigues 38-44, Edificio B, Airport infrastructure El Prat de Llobregat, Barcelona, 08220 development Spain 75% Iberia México, S.A.* Storage and Ejército Nacional 439, Ciudad de México, 11510 custody services Mexico 100% Aer Lingus Additional Information Country of Percentage of Name and address Principal activity Incorporation equity owned Aer Lingus Group DAC * Republic of Dublin Airport, Dublin Holding company Ireland 100% Aer Lingus Limited * Republic of Dublin Airport, Dublin Airline operations Ireland 100% ALG Trustee Limited 33-37 Athol Street, Douglas, Isle of Man, IM1 1LB Isle of Man 100% Aer Lingus (Ireland) Limited Republic of Dublin Airport, Dublin Ireland 100% Shinagh Limited Republic of Dublin Airport, Dublin Ireland 100% Santain Developments Limited Republic of Dublin Airport, Dublin Ireland 100% Aer Lingus Beachey Limited Penthouse Suite, Analyst House, Peel Road, Douglas, Isle of Man, IM1 4LZ Isle of Man 100% Aer Lingus Northern Ireland Limited Aer Lingus Base, Belfast City Airport, Northern Sydenham Bypass, Belfast, Co. Antrim, BT3 9JH Ireland 100% Aer Lingus 2009 DCS Trustee Limited Republic of Dublin Airport, Dublin Ireland 100% Dirnan Insurance Co. Ltd Canon's Court, 22 Victoria Street, Hamilton, Bermuda, HM 12 Bermuda 100% Avios Country of Percentage of Name and address Principal activity Incorporation equity owned Remotereport Trading Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% Avios South Africa Proprietary Limited Regus, 33 Ballyclare Drive, Cedarwood House, Gauteng, Johannesburg, 2191 South Africa 100%

www.iairgroup.com 173 GROUP INVESTMENTS CONTINUED

IAG Cargo Limited Country of Percentage of Name and address Principal activity Incorporation equity owned Zenda Group Limited Carrus Cargo Centre, PO Box 99, Sealand Road, London Heathrow Airport, Hounslow, Middlesex, TW6 2JS England 100% Vueling Country of Percentage of Name and address Principal activity Incorporation equity owned Anilec Holding GmbH Office Park I Top, Vienna, B041300 Austria 100% Waleria Beteiligungs GmbH Office Park I Top, Vienna, B041300 Austria Indirect Anisec Luftfahrt GmbH Office Park I Top, Vienna, B041300 Austria Indirect Level Country of Percentage of Name and address Principal activity Incorporation equity owned Openskies SASU 3 rue le Corbusier, Rungis, 94150 Airline operations France 100% FLY LEVEL UK Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% International Consolidated Airlines Group S.A. Country of Percentage of Name and address Principal activity Incorporation equity owned British Airways Plc * Waterside, PO Box 365, Harmondsworth, UB7 0GB Airline operations England 100%1 IB Opco Holding, S.L. Calle de Martínez Villergas 49, Madrid, 28027 Spain 100%2 Iberia Líneas Aéreas de España, S.A. Operadora * Airline operations and Calle de Martínez Villergas 49, Madrid, 28027 maintenance Spain 100%2 IAG GBS Poland sp. z.o.o. * IT, finance, procurement Ul. Opolska 114, Krakow, 31-323 services Poland 100% IAG GBS Limited * IT, finance, procurement Waterside, PO Box 365, Harmondsworth, UB7 0GB services England 100% IAG Cargo Limited * Carrus Cargo Centre, PO Box 99, Sealand Road, London Heathrow Airport, Hounslow, Middlesex, TW6 2JS Air freight operations England 100% Veloz Holdco, S.L. Calle de Velázquez 130, Madrid, 28006 Spain 100% Vueling Airlines, S.A. * Plaça Pla de l'Estany 5, Parque de Negocios Mas Blau II, El Prat de Llobregat, Barcelona, 08820 Airline operations Spain Indirect Aerl Holding Limited Waterside, PO Box 365, Harmondsworth, UB7 0GB England 100% IAG Connect Limited Republic of Waterside, PO Box 365, Harmondsworth, UB7 0GB Ireland 100% FLY LEVEL, S.L. Camino de la Muñoza s/n, El Caserío, Iberia Zona Industrial 2, Madrid, 28042 Spain 100% * Principal subsidiaries 1 The Group holds 49.9% of the total number of voting rights and 99.65% of the total nominal share capital in British Airways Plc, such stake having almost 100% of the economic rights. The remaining nominal share capital and voting rights, representing 0.35% and 50.1% respectively, correspond to a trust established for the purposes of implementing the British Airways nationality structure. 2 The Group holds 49.9% of both the total nominal share capital and the total number of voting rights in IB Opco Holding, S.L. (and thus, indirectly, in Iberia Líneas Aéreas de España, S.A. Operadora), such stake having almost 100% of the economic rights in these companies. The remaining shares, representing 50.1% of the total nominal share capital and the total number of voting rights belong to a Spanish company incorporated for the purposes of implementing the Iberia nationality structure.

174 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Associates Strategic Report Country of Percentage of Name and address Incorporation equity owned Dunwoody Airline Services Limited Building 70, Argosy Road, East Midlands Airport, Castle Donnington, Derby, DE74 2SA England 40% Empresa Logística de Carga Aérea, S.A. Carretera de Wajay km. 15, Aeropuerto José Martí, Ciudad de la Habana Cuba 50%

Empresa Hispano Cubana de Mantenimiento de Aeronaves, Corporate Governance Ibeca, S.A. Avenida de Vantroi y Final, Aeropuerto José Martí, Ciudad de la Habana Cuba 50% Multiservicios Aeroportuarios, S.A. Avenida de Manoteras 46, 2ª planta, Madrid, 28050 Spain 49% Serpista, S.A. Calle del Cardenal Marcelo Spínola 10, Madrid, 28016 Spain 39% Grupo Air Miles España, S.A. Avenida de Bruselas 20, Alcobendas, Madrid, 28108 Spain 27% Viajes Ame, S.A.U. Avenida de Bruselas 20, Alcobendas, Madrid, 28108 Spain 27% Financial Statements Programa Travel Club Agencia de Seguros Exclusiva, S.L.U. Avenida de Bruselas 20, Alcobendas, Madrid, 28108 Spain 27% Joint ventures Country of Percentage of Name and address Incorporation equity owned Sociedad Conjunta para la Emisión y Gestión de Medios de Pago EFC, S.A. Calle de José Ortega y Gasset 22, Planta 3ª, Madrid, 28006 Spain 50.5%

Other equity investments Additional Information The Group’s principal other equity investments are as follows: Profit/(loss) Country of Percentage of Shareholder’s before tax Name and address incorporation equity owned Currency funds (million) (million) Comair Limited 1 Marignane Drive, Bonaero Park, 1619 South Africa 11.5% ZAR 1,779 471 The Airline Group Limited 5th Floor, Brettenham House South, Lancaster Place, London, WC2N 7EN England 16.7% GBP 287 12 Adquira España, S.A. Calle de Julián Camarillo 21A, Planta 4ª, Madrid, 28037 Spain 10.0% EUR 1 – Travel Quinto Centenario, S.A. Calle Alemanes 3, Sevilla, 41004 Spain 10.0% EUR N/A N/A Servicios de Instrucción de Vuelo, S.L. Camino de la Muñoza s/n, El Caserío, Iberia Zona Industrial 2, Madrid, 28042 Spain 19.9% EUR 10 1 DeepAir Solutions Limited Ground Floor North, 86 Brook Street, London, W1K 5AY England 10.0% GBP N/A N/A

www.iairgroup.com 175 STATEMENT OF DIRECTORS’ RESPONSIBILITIES

LIABILITY STATEMENT OF DIRECTORS FOR THE PURPOSES ENVISAGED UNDER ARTICLE 8.1.b OF SPANISH ROYAL DECREE 1362/2007 OF 19 OCTOBER (REAL DECRETO 1362/2007). At a meeting held on February 27, 2019, the Directors of International Consolidated Airlines Group, S.A. (the “Company”) state that, to the best of their knowledge, the individual and consolidated financial statements for the year to December 31, 2018, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole, and that the individual and consolidated management reports include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with the description of the principal risks and uncertainties that they face. February 27, 2019

Antonio Vázquez Romero William Matthew Walsh Chairman Chief Executive Officer

Marc Jan Bolland Patrick Jean Pierre Cescau

Enrique Dupuy de Lôme Chávarri Deborah Linda Kerr

María Fernanda Mejía Campuzano Kieran Charles Poynter

Emilio Saracho Rodríguez de Torres Marjorie Morris Scardino

Lucy Nicola Shaw Alberto Terol Esteban

176 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance Financial Statements Additional Information

www.iairgroup.com 177 178 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance Financial Statements Additional Information

www.iairgroup.com 179 180 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Strategic Report Corporate Governance Financial Statements Additional Information

www.iairgroup.com 181 182 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 ALTERNATIVE PERFORMANCE MEASURES

The performance of the Group is assessed using a number of alternative performance measures (APMs), some of which have been identified as key performance indicators of the Group. The Group’s results are presented both before and after Strategic Report exceptional items. Exceptional items are those that in Management’s view need to be separately disclosed by virtue of their size and incidence. Exceptional items are disclosed in note 4 of the consolidated financial statements. In addition, the Group’s results are described using certain measures that are not defined under IFRS and are therefore considered to be APMs. These APMs are used to measure the outcome of the Group’s strategy based on ‘Unrivalled customer proposition’, ‘Value accretive and sustainable growth’ and ‘Efficiency and innovation’. Further information on why these APMs are used is provided in the Key performance indicators section. The definition of each APM presented in this report, together with a reconciliation to the nearest measure prepared in accordance with IFRS is presented below. Adjusted gearing is no longer reported as Management do not consider it to be a key performance indicator of the Group. Corporate Governance Operating profit and lease adjusted operating margin Operating profit is the Group operating result before exceptional items. Lease adjusted operating margin is operating profit adjusted for leases as a percentage of revenue. The lease adjustment reduces the fleet rental charge to 0.67 of the annual reported charge. This is to reflect the embedded interest expense component in leases; 0.67 is a commonly used ratio in the airline industry. 2017 2016 € million 2018 (restated)1 (restated)1 Operating profit before exceptional items 3,230 2,950 2,444 Aircraft operating lease costs 890 888 759 Aircraft operating lease costs multiplied by 0.67 (596) (595) (509) Financial Statements 3,524 3,243 2,694

Revenue 24,406 22,880 22,409

Lease adjusted operating margin 14.4% 14.2% 12.0%

1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the restatement is provided in note 33. Adjusted earnings per share

Earnings are based on results before exceptional items after tax and adjusted for earnings attributable to equity holders and Additional Information interest on convertible bonds, divided by the weighted average number of ordinary shares, adjusted for the dilutive impact of the assumed conversion of the bonds and employee share schemes outstanding. 2017 2016 € million 2018 (restated)1 (restated)1 Earnings attributable to equity holders of the parent 2,885 1,989 1,889 Exceptional items (416) 222 38 Earnings attributable to equity holders of the parent before exceptional items 2,469 2,211 1,927 Interest expense on convertible bonds 18 17 26 Adjusted earnings 2,487 2,228 1,953

Weighted average number of shares used for diluted earnings per share 2,113,081 2,179,353 2,210,990 Weighted average number of shares used for basic earnings per share 2,021,622 2,088,489 2,075,568

Adjusted earnings per share (€ cents) 117.7 102.2 88.3 Basic earnings per share before exceptional items (€ cents) 122.1 105.9 92.8

1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the restatement is provided in note 33. EBITDAR EBITDAR is calculated as operating profit before exceptional items, depreciation, amortisation and impairment and aircraft operating lease costs. 2017 2016 € million 2018 (restated)1 (restated)1 Operating profit before exceptional items 3,230 2,950 2,444 Depreciation, amortisation and impairment 1,254 1,184 1,287 Aircraft operating lease costs 890 888 759 EBITDAR 5,374 5,022 4,490

1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the restatement is provided in note 33.

www.iairgroup.com 183 ALTERNATIVE PERFORMANCE MEASURES CONTINUED

Return on Invested Capital Return on Invested Capital (RoIC) is defined as EBITDAR, less adjusted aircraft operating lease costs, fleet depreciation charge adjusted for inflation, and the depreciation charge for other property, plant and equipment, divided by invested capital. It is expressed as a percentage. The lease adjustment reduces aircraft operating lease costs to 0.67 of the annual reported charge. The inflation adjustment is applied to the fleet depreciation charge and is calculated using a 1.5 per cent inflation rate over the average age of the fleet to allow for inflation and efficiencies of new fleet. Invested capital is the fleet net book value at the balance sheet date, excluding progress payments for aircraft not yet delivered and adjusted for inflation, plus the net book value of the remaining property, plant and equipment plus annual aircraft operating lease costs multiplied by 8. Intangible assets are excluded from the calculation. 2017 2016 € million 2018 (restated)1 (restated)1 EBITDAR 5,374 5,022 4,490 Less: Aircraft operating lease costs multiplied by 0.67 (596) (595) (509) Less: Depreciation charge for fleet assets multiplied by inflation adjustment (1,205) (1,133) (1,231) Less: Depreciation charge for other property, plant and equipment (138) (140) (153) 3,435 3,154 2,597 Invested capital Fleet book value excluding progress payments 9,721 9,275 9,930 Inflation adjustment2 1.22 1.23 1.21 11,902 11,374 12,048 Net book value of other property, plant and equipment 1,647 1,613 1,683 Aircraft operating lease costs multiplied by 8 7,120 7,104 6,072 20,669 20,091 19,803 Return on Invested Capital 16.6% 15.7% 13.1%

1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the restatement is provided in note 33. 2 Presented to two decimal places and calculated using a 1.5 per cent inflation rate over the weighted average age of the on balance sheet fleet (2018: 13.6 years, 2017: 13.7 years) Adjusted net debt to EBITDAR Adjusted net debt is calculated as long-term borrowings, less cash and cash equivalents and other current interest-bearing deposits, plus annual aircraft operating lease costs multiplied by 8. This is divided by EBITDAR to arrive at adjusted net debt to EBITDAR. 2017 2016 € million 2018 (restated)1 (restated)1 Interest-bearing long-term borrowings 7,509 7,331 8,515 Cash and cash equivalents (3,837) (3,292) (3,337) Other current interest-bearing deposits (2,437) (3,384) (3,091) Net debt 1,235 655 2,087 Aircraft operating lease costs multiplied by 8 7,120 7,104 6,072 Adjusted net debt 8,355 7,759 8,159

EBITDAR 5,374 5,022 4,490

Adjusted net debt to EBITDAR 1.6 1.5 1.8

1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the restatement is provided in note 33.

184 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Equity free cash flow Strategic Report Equity free cash flow is EBITDA less cash tax, cash interest paid and received and CAPEX which is cash capital expenditure net of proceeds from sale of property, plant and equipment and intangible assets. EBITDA is calculated as operating profit before exceptional items, depreciation, amortisation and impairment. 2017 2016 € million 2018 (restated)1 (restated)1 Operating profit before exceptional items 3,230 2,950 2,444 Depreciation, amortisation and impairment 1,254 1,184 1,287 EBITDA 4,484 4,134 3,731 Corporate Governance

Interest paid (149) (122) (185) Interest received 37 29 37 Tax paid (343) (237) (318) Acquisition of property plant and equipment and intangible assets (2,802) (1,490) (3,038) Proceeds from sale of property, plant and equipment and intangible assets 574 306 1,737 Equity free cash flow 1,801 2,620 1,964

1 Restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments’. Further detail on the restatement is provided in note 33. Financial Statements Additional Information

www.iairgroup.com 185 GLOSSARY

Adjusted aircraft operating leases Aircraft operating lease costs multiplied by 0.67 Adjusted earnings per share Earnings are based on results before exceptional items, after tax adjusted for earnings attributable to equity holders and interest on convertible bonds, divided by the weighted average number of ordinary shares, adjusted for the dilutive impact of the assumed conversion of the bonds and employee share schemes outstanding Adjusted net debt Net debt plus capitalised aircraft operating lease costs Available seat kilometres (ASK) The number of seats available for sale multiplied by the distance flown Available tonne kilometres (ATK) The number of tonnes of capacity available for the carriage of load (passenger and cargo) multiplied by the distance flown Block hours Hours of service for aircraft, measured from the time that the aircraft leaves the gate at the departure airport to the time that it arrives at the gate at the destination airport Cargo revenue per CTK Cargo revenue divided by CTK Cargo tonne kilometres (CTK) The number of tonnes of cargo carried that generate revenue (freight and mail) multiplied by the distance flown Dividend cover The number of times profit for the year covers the dividends paid and proposed EBITDAR Operating profit before depreciation, amortisation and rental charges Equity free cash flow EBITDA before exceptional items less cash tax, cash interest paid and received and cash capital expenditure net of proceeds from sale of property, plant and equipment and intangible assets Interest cover The number of times profit before taxation and net interest expense and interest income cover the net interest expense and interest income Invested capital Fleet net book value at the balance sheet date, excluding progress payments and adjusted for inflation, plus the net book value of the remaining property, plant and equipment plus annual aircraft operating lease costs multiplied by 8 Lease adjusted operating margin Operating result less aircraft operating lease cost plus adjusted aircraft operating lease costs divided by revenue Manpower equivalent Number of employees adjusted for part-time workers, overtime and contractors Merger effective date January 21, 2011, the date British Airways and Iberia signed a merger agreement to create International Airlines Group Net debt Current and long-term interest-bearing borrowings less other current interest-bearing deposits and cash and cash equivalents

186 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 Net depreciation rate Gross book value divided by net book value Strategic Report Net Promoter Score (NPS) The Net Promoter Score (NPS) is a metric based on survey responses to the “likelihood to recommend” question and is calculated by subtracting the percentage of customers who are ‘Detractors’ (score 0-6, unlikely to recommend) from the percentage of customers who are ‘Promoters’ (score 9-10, likely to recommend) Operating margin Operating profit/(loss) as a percentage of total revenue Overall load factor RTK expressed as a percentage of ATK Passenger load factor RPK expressed as a percentage of ASK

Punctuality The industry’s standard, measured as the percentage of flights departing within 15 Corporate Governance minutes of schedule Regularity The percentage of flights completed to flights scheduled, excluding flights cancelled for commercial reasons Return on invested capital (RoIC) EBITDAR less adjusted aircraft operating lease costs, fleet depreciation charge adjusted for inflation, and the depreciation charge for other property, plant and equipment, divided by invested capital. It is expressed as a percentage Revenue passenger kilometres (RPK) The number of passengers that generate revenue carried multiplied by the distance flown Passenger unit revenue per ASK Passenger revenue divided by ASK (PASK) Passenger revenue per RPK (yield) Passenger revenue divided by RPK Financial Statements Revenue tonne kilometres (RTK) The revenue load in tonnes multiplied by the distance flown Sector A one-way revenue flight Sold cargo tonnes The number of cargo tonnes sold, including freight, courier, mail and interline Total capital Total equity plus net debt Total Group revenue per ASK (RASK) Total group revenue divided by ASK Total operating expenditure excluding Total operating expenditure excluding fuel divided by ASK fuel per ASK Total operating expenditure Total operating expenditure divided by ASK per ASK (CASK) Additional Information Total traffic revenue per ATK Revenue from total traffic (passenger and cargo) divided by ATK

www.iairgroup.com 187 OPERATING AND FINANCIAL STATISTICS

Total Group operations 2018 20171 2016 20152 2014 Traffic and capacity Available seat km (ASK) million 324,808 306,185 298,431 272,702 251,931 Revenue passenger km (RPK) million 270,657 252,819 243,474 221,996 202,562 Cargo tonne km (CTK) million 5,713 5,762 5,454 5,293 5,453 Passengers carried ‘000 112,920 104,829 100,675 88,333 77,334 Sold cargo tonnes ‘000 702 701 680 661 677 Sectors 754,700 717,325 708,615 660,438 599,624 Block hours hours 2,207,374 2,100,089 2,067,980 1,867,905 1,712,506 Operations Average manpower equivalent 64,734 63,422 63,387 60,862 59,484 Aircraft in service at year end 573 546 548 529 459 Aircraft utilisation – Longhaul (average hours per aircraft per day) hours 13.5 13.5 13.5 13.5 13.5 Aircraft utilisation – Shorthaul (average hours per aircraft per day) hours 9.0 8.9 8.8 9.1 8.8 Punctuality – within 15 minutes % 75.5 81.8 77.2 80.2 80.9 Regularity % 98.7 99.1 99.3 99.4 99.5 Financial Passenger unit revenue per ASK (PASK) €cents 6.63 6.63 6.68 7.46 7.08 Passenger revenue per RPK €cents 7.96 8.02 8.18 9.16 8.80 Cargo revenue per CTK €cents 20.53 19.65 18.74 20.67 18.19 Total revenue per ASK (RASK) €cents 7.51 7.47 7.56 8.38 8.01 Average fuel price ($cents/metric tonne) 687 519 425 908 990 Fuel cost per ASK €cents 1.63 1.51 1.63 2.23 2.38 Operating profit before depreciation, amortisation and rentals (EBITDAR) €million 5,374 5,022 4,581 4,301 3,137 Total operating expenditure excluding fuel per ASK (CASK ex. fuel) €cents 4.89 5.00 5.08 5.30 5.08 Operating margin % 13.2 12.9 10.91 10.2 6.9 Lease adjusted operating margin % 14.4 14.2 12.01 11.2 7.8 Total operating expenditure per ASK (CASK) €cents 6.52 6.51 6.71 7.53 7.45 Dividend cover times 4.0 4.0 4.0 3.8 n/a Interest cover times 17.0 16.4 10.8 8.2 6.4 Net debt €million 1,235 655 2,087 2,774 1,673 Equity €million 6,720 6,933 7,741 7,328 3,793 Adjusted net debt to EBITDAR times 1.6 1.5 1.8 1.9 1.9 Exchange rates Translation – weighted average £:€ 1.13 1.14 1.21 1.39 1.25 Transaction £:€ 1.13 1.14 1.21 1.40 1.25 Transaction €:$ 1.18 1.14 1.11 1.11 1.34 Transaction £:$ 1.33 1.29 1.34 1.55 1.67

1 Figures restated for new accounting standards IFRS 15 ‘Revenue from contracts with customers’ and IFRS 9 ‘Financial instruments. 2 Aer Lingus Group plc results have been consolidated from the 18th of August 2015. n/a: not available

188 INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2018 SHAREHOLDER INFORMATION

Registered office American Depositary Receipt program International Consolidated Airlines Group, S.A IAG has a Sponsored Level 1 American Depositary Receipt El Caserío, Iberia Zona Industrial nº 2 (La Muñoza) (ADR) facility that trades on the OTC market in the US Camino de La Muñoza, s/n, 28042 Madrid, Spain. (see www.otcmarkets.com). Deutsche Bank is the ADR Madrid Commercial Registrar depositary bank. tomo 27312, folio 11, hoja M-492129 For shareholder enquiries, contact: C.I.F. A85845535 Deutsche Bank Trust Company Americas c/o American Stock Transfer & Trust Company Peck Slip Station P.O. Box UK Branch registered address 2050 New York, NY 10272-2050, USA International Airlines Group Waterside (HAA2), Email: [email protected] PO Box 365, Speedbird way Toll free: +1 800 301 3517 Harmondsworth, UB7 0GB International: +1 718 921 8137 Registered in England & Wales: BR014868 Online: www.adr.db.com Registrar Financial calendar Computershare Investor Services PLC Financial year end: December 31, 2018 For enquiries relating to shares held through the Q1 results: May 10, 2019 Corporate Sponsored Nominee (UK share register): Half year results: August 2, 2019 Tel: +44 370 702 0110 Q3 results: October 31, 2019 Email: [email protected] Other key dates can be found on our website: www.iairgroup.com Online: www.investorcentre.co.uk/iag ShareGift IAG Investor relations team UK shareholders with a small number of shares may like to UK: +44 20 8564 2900; or consider donating their shares to charity under ShareGift, Spain: +34 91 312 6440 administered by Orr Mackintosh Foundation. Details are available from the UK Registrar. Institutional investors: [email protected] Private shareholders: [email protected]

Certain statements included in this report are forward-looking and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements can typically be identified by the use of forward-looking terminology, such as “expects”, “may”, “will”, “could”, “should”, “intends”, “plans”, “predicts”, “envisages” or “anticipates” and include, without limitation, any projections relating to results of operations and financial conditions of International Consolidated Airlines Group S.A. and its subsidiary undertakings from time to time (the ‘Group’), as well as plans and objectives for future operations, expected future revenues, financing plans, expected expenditures and divestments relating to the Group and discussions of the Group’s Business plan. All forward-looking statements in this report are based upon information known to the Group on the date of this report. The Group undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. It is not reasonably possible to itemise all of the many factors and specific events that could cause the forward-looking statements in this report to be incorrect or that could otherwise have a material adverse effect on the future operations or results of an airline operating in the global economy. Further information on the primary risks of the business and the risk management process of the Group is set out in the risk management and risk factors section of the report. 2018 Annual report and accounts L A N O I T A ES N I L ERN R T ROUP N I AI G Visit us online at online us Visit iairgroup.com